Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

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What is the formula to calculate the flat yield on a bond?

Price/coupon x 100
Coupon/price x 100
Face value/coupon x 100
Coupon/face value x 100

The correct answer is: Coupon/price x 100

The flat yield on a bond is calculated by taking the annual coupon payment and dividing it by the current market price of the bond. This ratio gives investors an indication of the bond's income relative to its price, which is crucial for assessing whether the bond is a good investment opportunity at its current market price. Using the formula of coupon divided by price multiplied by 100 allows investors to express this yield as a percentage, making it easier to compare with other investment opportunities or interest rates. This measure is particularly useful for assessing the return on investment from holding the bond, independent of other factors such as capital gains. In this context, the annual coupon is the fixed interest payment the bondholder receives, while the price is what the investor would pay to acquire the bond in the market. Thus, this approach clearly communicates the bond's income generation capacity relative to its market value, which is an essential consideration for any bond investor.