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:

Question

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%.