Question

Cheryl wants to purchase a par value $500 bond from Agram Imports. Agram Imports bonds have a market rate of 102.114 and offer 8.1% interest. If Cheryl’s broker charges a commission of 2.5% of the market value of each bond sold, what is the current yield on Cheryl’s bond?
a.
0.077
b.
0.078
c.
0.081
d.
0.040

Answer 1

Market price = 500 × 1.02114 = $510.57.
Commission = 2.5% × 510.57 = $12.76425, so total cost = 510.57 + 12.76425 = $523.33425.
Annual interest = 0.081 × 500 = $40.50.
Current yield = 40.50 / 523.33425 ≈ 0.0774 ≈ 0.077.

Answer: a. 0.077