13. A customer purchased a 5.00% coupon corporate bond at 98. The bond pays interest semiannually and is now trading at par. What is the bond's current yield?
Answer: C
The bond's current yield is 5.00%.
The bond's current yield is calculated by taking the annual interest payment and dividing it by the current market price of the bond. Since the bond is now trading at par, the current yield equals the coupon rate of 5.00%.
A) 2.50%
This option is incorrect because a current yield of 2.50% would imply that the bond's annual interest payment is significantly lower than the market price, which contradicts the information that the bond is trading at par.
B) 2.55%
This option is also incorrect as it suggests a current yield slightly above 2.50%, which does not align with the bond's coupon rate or the fact that it is trading at par. The current yield should reflect the full coupon rate when the bond is at par.
C) 5.00%
This option is correct because the bond pays an annual interest of 5.00% and is currently trading at par value. Therefore, the current yield, which is the annual interest divided by the current price, equals the coupon rate of 5.00%.
D) 5.10%
This option is incorrect as it indicates a current yield higher than the bond's coupon rate. Since the bond is trading at par, the current yield cannot exceed the coupon rate of 5.00%.
Conclusion
The correct answer is 5.00% because the bond's current yield matches its coupon rate when trading at par. All other options are incorrect as they misrepresent the relationship between the bond's interest payments and its market price. Thus, option C accurately reflects the bond's yield under the given circumstances.