Answer to Question #6024 in Economics of Enterprise for LaMarcus Streeter

Question

Which of the following statements is CORRECT?

a. Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. The premium bond must have a lower current yield and a higher capital gains yield than the par bond.
b. A bond’s current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.
c. If a bond sells at par, then its current yield will be less than its yield to maturity.
d. If a bond sells for less than par, then its yield to maturity is less than its coupon rate.
e. A discount bond’s price declines each year until it matures, when its value equals its par value.

Answer 1

a. Assume that two bonds have equal maturities and are of equal risk, but one
bond sells at par while the other sells at a premium above par.
The premium
bond must have a lower current yield and a higher capital gains yield than the
par bond.