How is yield on bonds calculated?

The yield on bonds is effectively calculated by dividing the coupon amount by the purchase price. This calculation provides insights into the return on investment that a bondholder can expect based on the bond’s current market price and the interest (coupon) it pays.

When you take the coupon amount, which represents the annual interest payment made to bondholders, and divide it by the purchase price of the bond, you arrive at the yield. This yield reflects the bond’s return relative to its price in the market, helping investors assess whether the bond is a worthwhile investment compared to other available bonds or investment opportunities.

The other options involve operations that do not accurately reflect the relationship between the bond's interest payments and its market price. Adding, multiplying, or subtracting the coupon amount from the price does not yield a meaningful interpretation of the bond's yield. Thus, for assessing the profitability of bonds, using the division of coupon payments by the purchase price is the appropriate method.