3. Which of the following statements is CORRECT? a. Assume that two bonds have e

Question

3. 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 bonds 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 bonds price declines each year until it matures, when its value equals its par value

Explanation / Answer

since YTM for both bonds will be same as they have same level of risk and also the current yield is actually how much a debt instrument is making for an investor in interest per year if the coupon is being paid annually thus the right answer should be : 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.

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