Asked by Kanidra Stringer on Jun 11, 2024
Verified
Which statement regarding bond yields is true?
A) If a coupon bond is selling at a premium, then the bond's current yield is zero.
B) If a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity.
C) The current yield on Bond A exceeds the current yield on Bond B. Therefore, Bond A must have a higher yield to maturity than Bond B.
D) If a coupon bond is selling at par, its current yield equals its yield to maturity.
Yield to Call
The return an investor would receive if a callable bond is held until the issuer exercises their option to redeem it before its maturity date.
Current Yield
The annual interest payment of a bond divided by its current market price, used to compare the return on investment of different bonds.
Coupon Bond
A debt security that pays the holder a fixed interest rate (the coupon) periodically until maturity, at which point the principal is repaid.
- Understand the relationship between bond prices and yields, including yield to maturity (YTM), current yield, and yield to call (YTC).
Verified Answer
AG
Artavia GuytonJun 11, 2024
Final Answer :
D
Explanation :
When a coupon bond is selling at par, it means the bond's price is equal to its face value. In this case, the coupon rate on the bond equals the yield to maturity, and the bond's current yield equals its yield to maturity. Hence, Option D is correct.
Option A is incorrect because, when a coupon bond is selling at a premium, the bond's current yield is lower than the yield to maturity.
Option B is incorrect because the yield to call only measures the expected return on the bond if it is called according to the issuer's option, which may or may not happen. Therefore, yield to maturity is a better measure of the expected return.
Option C is incorrect because the current yield only measures the annual income from a bond in relation to its current market price, whereas the yield to maturity measures the total expected return on a bond, including capital gains or losses, over its entire life. Therefore, we cannot infer the relative yields to maturity of two bonds based only on their current yields.
Option A is incorrect because, when a coupon bond is selling at a premium, the bond's current yield is lower than the yield to maturity.
Option B is incorrect because the yield to call only measures the expected return on the bond if it is called according to the issuer's option, which may or may not happen. Therefore, yield to maturity is a better measure of the expected return.
Option C is incorrect because the current yield only measures the annual income from a bond in relation to its current market price, whereas the yield to maturity measures the total expected return on a bond, including capital gains or losses, over its entire life. Therefore, we cannot infer the relative yields to maturity of two bonds based only on their current yields.
Learning Objectives
- Understand the relationship between bond prices and yields, including yield to maturity (YTM), current yield, and yield to call (YTC).