You currently own a bond you purchased at par when it was issued ten years ago.
ID: 2733193 • Letter: Y
Question
You currently own a bond you purchased at par when it was issued ten years ago. The bond has a 7 percent annual coupon and matures 5 years from now. Which one of the following statements applies to this bond if the relevant market interest rate is now 4.8 percent? The current yield-to-maturity is greater than 7 percent. The current yield is 7 percent. The next interest payment will be $35. The bond is currently valued at one-half of its issue price. You will realize a capital gain on the bond if you sell it today.
The current yield-to-maturity is greater than 7 percent.
The current yield is 7 percent.
The next interest payment will be $35.
The bond is currently valued at one-half of its issue price.
You will realize a capital gain on the bond if you sell it today.
The current yield-to-maturity is greater than 7 percent.
The current yield is 7 percent.
The next interest payment will be $35.
The bond is currently valued at one-half of its issue price.
You will realize a capital gain on the bond if you sell it today.
Explanation / Answer
The correct answer is
E. You will realize a capital gain on the bond if you sell it today.
Capital Gain will be realized if we sell the bond today as we are selling a bond whose rate is more than the market rate therefore the buyer will earn more profit and we will charhge higher price for the bond and hence the capital gain will be recognized
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