Question

A bond with no expiration date has a face value of R10,000 and pays a fixed 10 percent interest. If the market price of the bond rises to R11,000, the annual yield approximately equals:

Answers:
11 %

10 %

9 %

8 %

Answer 1

To calculate the annual yield of the bond when the market price rises to R11,000, we can use the formula for current yield:

\[
\text{Current Yield} = \frac{\text{Annual Interest Payment}}{\text{Market Price}}
\]

1. **Calculate the Annual Interest Payment**:
- The bond has a face value of R10,000 and pays an interest rate of 10%. Thus, the annual interest payment is:
\[
\text{Annual Interest Payment} = R10,000 \times 0.10 = R1,000
\]

2. **Calculate the Current Yield**:
- The market price of the bond is R11,000. Therefore, the current yield can be calculated as:
\[
\text{Current Yield} = \frac{R1,000}{R11,000} \approx 0.09091 \text{ or } 9.09\%
\]

Hence, the annual yield approximately equals **9%**.

The correct answer is **9%**.