A 10-year bond has a 10 percent annual coupon and a yield to maturity of 12 percent. The bond can be called in 5 years at a call price of $1,050 and the bond's face value is $1,000. Which of the following statements is most correct?

Question

Quizplus · Accepted Answer

a) The bond's current yield can be calculated by dividing the annual coupon payment by its price in the market. Here, the annual coupon payment is $100 ($1,000 x 10%) and the market price is less than $1,000 (as the bond is selling below par). Therefore, the current yield is greater than 10%.
c) As mentioned earlier, the bond is selling below par. This is because its yield to maturity (12%) is greater than its annual coupon rate (10%). When the yield to maturity is greater than the coupon rate, the bond is said to be selling at a discount.
Hence, both answers a and c are correct.

A 10-Year Bond Has a 10 Percent Annual Coupon and a Yield