How is yield on a bond typically calculated?

How is yield on a bond typically calculated?

• A. Coupon amount divided by price
• B. Face value divided by interest rate
• C. Interest rate multiplied by maturity
• D. Principal amount divided by coupon

Answer: (A)

The correct calculation for yield on a bond is obtained by dividing the coupon amount by the current price of the bond. This method expresses yield as a percentage of the bond’s price, reflecting the income an investor can expect to earn relative to the amount paid for the bond. In essence, it provides a measure of the bond’s return based on the cash flow (the coupon payments) received from the investment, adjusted for the investment's current market value. Using this approach effectively helps investors assess the attractiveness of a bond compared to others, particularly in fluctuating market environments. Yield can vary depending on the bond's purchase price as well as its coupon amount, making this formula a straightforward way to express bond yield as a percentage. The other answer choices either do not accurately represent how yield is calculated or lack relevance to the most commonly accepted financial practices. For example, dividing face value by the interest rate does not provide a meaningful measure of yield, as it doesn't account for the bond's current market price or its cash flows.

The correct calculation for yield on a bond is obtained by dividing the coupon amount by the current price of the bond. This method expresses yield as a percentage of the bond’s price, reflecting the income an investor can expect to earn relative to the amount paid for the bond. In essence, it provides a measure of the bond’s return based on the cash flow (the coupon payments) received from the investment, adjusted for the investment's current market value.

Using this approach effectively helps investors assess the attractiveness of a bond compared to others, particularly in fluctuating market environments. Yield can vary depending on the bond's purchase price as well as its coupon amount, making this formula a straightforward way to express bond yield as a percentage.

The other answer choices either do not accurately represent how yield is calculated or lack relevance to the most commonly accepted financial practices. For example, dividing face value by the interest rate does not provide a meaningful measure of yield, as it doesn't account for the bond's current market price or its cash flows.