Canadian Securities Course (CSC) Level 1 Practice Exam

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What is the current yield on a bond calculated from?

  1. Annual Cash flow / Current market price

  2. (Annual Cash flow / Current market price) x 100

  3. Annual Cash flow x Current market price

  4. Current market price / Annual Cash flow

The correct answer is: (Annual Cash flow / Current market price) x 100

The correct calculation of the current yield on a bond is derived from taking the annual cash flow generated by the bond, which typically comes from the coupon payments, and dividing it by the bond's current market price. This gives you a ratio that reflects the bond's return relative to its market value. Multiplying this ratio by 100 converts it into a percentage, allowing for easier comparison with other investments and providing a clearer understanding of the yield. This is a standard method for assessing the income component of a bond's return, especially for investors looking to evaluate the yield in the current market context. While simply dividing the annual cash flow by the current market price provides a ratio, expressing it as a percentage is more intuitive for investors. Other methods, such as those involving multiplication of the cash flow and market price, do not accurately reflect the current yield concept.

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