101 #
© 2014 Pearson Canada Inc.#- How is current yield defined? How can it be used to determine yield to maturity for long-
term bonds?
Answer: The current yield is the is the yield to maturity of a perpetuity or consol. It is given by
the formula:
ic = , where C is the yearly payment and P is the price of the perpetuity. When a coupon bond
has a long term to maturity, it is very much like a perpetuity. The current yield will be very close
to the yield to maturity for a long term bond and is used as an approximation to describe interest
rates on long term bonds.
Diff: 3 Type: SA Page Ref: 71
Skill: Recall
Objective List: 4.1 Understand how interest rates are measured
4.2 The Distinction Between Interest Rates and Returns
The ____ is defined as the payments to the owner plus the change in a security's value
expressed as a fraction of the security's purchase price.
A) yield to maturity
B) current yield
C) rate of return
D) yield rate
Answer: C
Diff: 1 Type: MC Page Ref: 74
Skill: Recall
Objective List: 4.2 Discern among the ways of measuring the interest rate
Which of the following is true concerning the distinction between interest rates and returns?
A) The rate of return on a bond will not necessarily equal the interest rate on that bond.
B) The return can be expressed as the difference between the current yield and the rate of capital
gains.
C) The rate of return will be greater than the interest rate when the price of the bond falls
between time t and time t + 1.
D) The return can be expressed as the sum of the discount yield and the rate of capital gains.
Answer: A
Diff: 1 Type: MC Page Ref: 74
Skill: Recall
Objective List: 4.2 Discern among the ways of measuring the interest rate
The sum of the current yield and the rate of capital gain is called the ____.
A) rate of return
B) discount yield
C) perpetuity yield
D) par value
Answer: A
Diff: 1 Type: MC Page Ref: 75
Skill: Recall
Objective List: 4.2 Discern among the ways of measuring the interest rate