Question #23061

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.

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.

Expert's answer

Answer:

b) is a correct answer.

Because:

a discount: YTM > current yield > coupon yield

a premium: coupon yield > current yield > YTM

par: YTM = current yield = coupon yield.

b) is a correct answer.

Because:

a discount: YTM > current yield > coupon yield

a premium: coupon yield > current yield > YTM

par: YTM = current yield = coupon yield.

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