Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

How do you calculate flat yield?

1. Annual coupon divided by face value.

2. Annual coupon divided by bond price times 100.

3. Yield to maturity divided by years to maturity.

4. Annual dividend divided by market value times 100.

The correct answer is: Annual coupon divided by bond price times 100.

Calculating flat yield is an essential metric for assessing the income generated by a bond relative to its market price. The correct calculation approach involves taking the annual coupon payment and dividing it by the bond's current market price, then multiplying by 100 to express it as a percentage. This method captures how much return an investor can expect relative to what they would pay for the bond in the open market, allowing for a direct comparison to other investments or yields. This formula, represented in your answer, effectively illustrates the yield an investor can expect if they were to purchase the bond at its current market price, rather than at its face or par value. It emphasizes the importance of recognizing that bond prices fluctuate in the market, which can significantly affect the yield received by investors. The other approaches focus on different metrics or methods that do not provide the accurate calculation of flat yield in terms of the market environment. For example, dividing the annual coupon by the face value calculates a different yield measure tied to the bond's nominal or par value rather than its current market conditions.