Which of the following statements is CORRECT? a. The yield to maturity for a cou

Question

Which of the following statements is CORRECT?
a. The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield.
b. The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.
c. On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.
d. Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices.
e. The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm has filed for bankruptcy

Explanation / Answer

Consider statement B.

In case of a bond which sells at par, the bond price is equal to the face value of the bond and for it the coupon rate is the yield to maturity of the bond.

Since the yield is only the coupon payments there is no capital gain.

Also, since, the bond price is same as the face value of the bond, there is no capital gains on the bond.

Hence, the correct statement is the yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.

Therefore, the correct option is B.

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