Which of the following best describes the current yield of a bond?

• A. The bond’s annual coupon divided by its yield to maturity.
• B. The bond’s annual coupon divided by its current market price.
• C. The bond’s face value divided by its annual coupon.
• D. The bond’s yield to maturity divided by its current market price.

Answer: (B)

Verified step by step guidance

1. Understand the concept of current yield: Current yield is a measure of the annual income (interest or coupon payments) earned from a bond relative to its current market price.
2. Identify the formula for current yield: The formula is \( \text{Current Yield} = \frac{\text{Annual Coupon Payment}}{\text{Current Market Price}} \). This formula highlights the relationship between the bond's annual coupon payment and its current market price.
3. Clarify the components of the formula: The annual coupon payment is the fixed interest payment made by the bond issuer to the bondholder each year, and the current market price is the price at which the bond is currently trading in the market.
4. Compare the given options: Evaluate each option against the formula for current yield. For example, 'The bond’s annual coupon divided by its yield to maturity' does not match the formula for current yield, as yield to maturity is a different concept.
5. Select the correct description: Based on the formula \( \text{Current Yield} = \frac{\text{Annual Coupon Payment}}{\text{Current Market Price}} \), the correct answer is 'The bond’s annual coupon divided by its current market price.'