Doug purchases a bond with a face value of $10,000 and a coupon rate of 5%, paying $9,700. What is Doug's current yield?

To determine Doug's current yield from the bond he purchased, it's essential to focus on the current yield formula. Current yield is calculated by taking the annual coupon payment and dividing it by the bond's current market price.

In this case, Doug's bond has a face value (or par value) of $10,000 and a coupon rate of 5%. The coupon payment, which is received annually, is calculated as follows:

Annual Coupon Payment = Face Value × Coupon Rate = $10,000 × 0.05 = $500.

Next, we must take the market price at which Doug purchased the bond, which is $9,700. The formula for current yield is:

Current Yield = (Annual Coupon Payment / Current Market Price) × 100.

Substituting in the values we have:

Current Yield = ($500 / $9,700) × 100 ≈ 5.1546%.

When rounded to two decimal places, this results in a current yield of approximately 5.15%.

Therefore, Doug's current yield of 5.15% accurately reflects the relationship between the annual income generated by the bond and its purchase price, given its market conditions. This calculation highlights how current yield provides a useful measure of