Asked by i love chips on May 07, 2024
Verified
A 15-year bond with a face value of $1,000 currently sells for $850.Which statement regarding the bond's yield is true?
A) The bond's coupon rate exceeds its current yield.
B) The bond's current yield exceeds its yield to maturity.
C) The bond's yield to maturity is greater than its coupon rate.
D) The bond's current yield is equal to its coupon rate.
Coupon Rate
The coupon rate is the annual interest rate paid on a bond, expressed as a percentage of the face value.
Yield To Maturity
The total return anticipated on a bond if the bond is held until its maturity date, factoring in its current market price, par value, interest payments, and time to maturity.
Current Yield
The yearly earnings from interest or dividends, when divided by the security's current market price.
- Scrutinize the effect that variations in market interest rates have on bond prices and their yields.
- Assess the link between the length of bond maturity, volatility in bond prices, and the exposure to interest rate fluctuations.
Verified Answer
MW
Mayerz WorldMay 10, 2024
Final Answer :
C
Explanation :
When a bond is selling at a discount, it means the yield to maturity is greater than its coupon rate. In this case, the bond is selling for $850 which is less than its face value of $1,000 indicating the yield to maturity is higher than the bond's coupon rate. Therefore, the statement that the bond's yield to maturity is greater than its coupon rate is true.
Learning Objectives
- Scrutinize the effect that variations in market interest rates have on bond prices and their yields.
- Assess the link between the length of bond maturity, volatility in bond prices, and the exposure to interest rate fluctuations.