Current yield is defined as:
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A. B. C. D.A
The correct answer is D. Current yield is defined as the coupon rate expressed as a percentage of the prevailing market price.
Current yield is a financial metric used to evaluate the return on a fixed-income investment, such as bonds. It represents the annual interest income generated by the investment relative to its market price. The formula for calculating the current yield is:
Current Yield = Annual Coupon Payment / Market Price
Here's a detailed explanation of each answer choice:
A. Internal rate of return that equates the prevailing market price with future interest and principle payments: This definition refers to the yield to maturity (YTM) rather than the current yield. YTM represents the total return anticipated on a bond if it is held until its maturity date and all interest and principal payments are received. It takes into account the future cash flows and the current market price.
B. Approximate yield to call for premium bonds: This definition refers to the yield to call (YTC) for premium bonds. YTC is the approximate yield an investor would receive if the bond is called by the issuer before its maturity date. It is relevant for bonds that have call features allowing the issuer to redeem them early.
C. Coupon interest divided by the average of market and call prices: This definition does not accurately describe the concept of current yield. It seems to be a combination of market price, call price, and coupon interest, but it does not reflect the standard definition of current yield.
D. Coupon rate expressed as a percent of the prevailing market price: This definition correctly describes current yield. It represents the coupon rate, which is the annual interest payment expressed as a percentage of the bond's face value, divided by the prevailing market price of the bond. It provides a measure of the income generated by the bond relative to its market value.
In summary, current yield is a measure of the income return on a bond investment and is calculated by dividing the bond's annual coupon payment by its market price.