A bond’s current yield is calculated as annual interest (coupon payment) divided by the bond’s current market price. For a fixed-rate bond, the annual interest amount is based on the coupon rate times par value (typically $1,000 par). With a 7% coupon, annual interest is $70 per $1,000 of par value. Since the coupon payment is fixed, the current yield becomes higher when the purchase price is lower, because you are receiving the same $70 of annual interest while paying less for the bond.
In this question, the possible market prices are 92, 100, 102, and 107 (quoted as percentages of par). A price of 92 means the bond costs $920 per $1,000 par. The current yield at 92 is $70 ÷ $920, which is higher than $70 ÷ $1,000 (at par), higher than $70 ÷ $1,020, and higher than $70 ÷ $1,070. Therefore, the bond has the highest current yield at the lowest price, which is 92.
This question is testing a fundamental SIE relationship: for bonds, yield and price move inversely. While “current yield” is a simpler measure than yield to maturity (YTM) because it ignores time to maturity and any gain/loss if the bond is redeemed at par, it is still widely used as a quick comparison tool. The exam expects you to recognize that as price declines (discount), current yield rises; as price increases (premium), current yield falls—assuming the coupon rate is fixed. The SIE outline includes debt instrument basics such as coupon, par, yield, and price/yield relationships.
