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

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.

Explanation / Answer

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. Take an eg. A Bond of FV $1000 & COupon 10% ANuual & maturity 10 Yrs. Its PV is $900. So its YTM = Rate(nper,PMT,PV,FV) ie YTM=Rate(10,100,-900,1000) = 11.75% Current Yield = 100/900 = 11.11% So Current Yield is between its yield to maturity and its coupon rate. ie 11.11% is between 10% & 11.75%...................Verified Now suppose that Bond PV =1100, Bond of FV $1000 & COupon 10% ANuual & maturity 10 Yrs. So its YTM = Rate(nper,PMT,PV,FV) ie YTM=Rate(10,100,-1100,1000) = 8.48% Current Yield = 100/1100 = 9.09% So Current Yield is between its yield to maturity and its coupon rate. ie 9.09% is between 8.48% & 10% ................... Verified

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