The correct answer is B, 7.27%. Current yield measures the annual income (coupon interest) relative to the bond’s current market price, not its par value.
Step-by-step calculation:
First, determine the annual interest payment (coupon):Coupon rate × Par value = 8% × $1,000 = $80 annual interest
Next, divide the annual interest by the current market price:Current yield = Annual interest / Market price= $80 / $1,100
Perform the calculation:$80 ÷ $1,100 = 0.0727, or 7.27%
This result shows that when a bond trades at a premium (above par), its current yield is lower than the coupon rate. This is because investors are paying more than $1,000 but still only receiving $80 annually.
Choice A (7.00%) is incorrect because it underestimates the yield. Choice C (7.77%) is incorrect and does not match the formula. Choice D (8.00%) represents the coupon rate, not the current yield.
Thus, the correct current yield is 7.27%, making Answer B correct.
