Products & Their RisksQuestion 36 of 398
A bond has a 6% coupon and is currently priced at $1,200 (a premium). Its current yield is:
a.Exactly 6%
b.Higher than 6%
c.Cannot be determined
d.Lower than 6%
Explanation
Current yield equals annual coupon divided by market price, so $60 / $1,200 = 5%, which is lower than the 6% coupon because the price is above par. When a bond trades at a premium, its current yield falls below the coupon rate.
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