If Soren Aland's 4% XYZ corporate bond has a current yield of 5%, he purchased the bond at what price?

To determine the price at which Soren Aland purchased the 4% XYZ corporate bond, knowing that it has a current yield of 5% is key. The current yield of a bond is calculated by taking the bond's annual coupon payment and dividing it by its current market price.

In this case, the bond has a fixed coupon rate of 4%. This means that for every $1,000 in face value, the bond will pay $40 annually ($1,000 * 4%). Since the current yield is 5%, we can derive the current price of the bond using the current yield formula:

Current Yield = Annual Coupon Payment / Current Price

Rearranging this gives us:

Current Price = Annual Coupon Payment / Current Yield

Substituting the known values:

Current Price = $40 / 0.05 = $800

Since the bond's face value is typically $1,000, and it is currently selling for $800, it indicates that the bond is selling for less than its face value. This situation usually occurs when market interest rates are higher than the coupon rate, leading to the bond being sold at a discount. Thus, Soren must have purchased the bond at a discount, explaining why the