Assume a semi-annual coupon bond matures in 3 years, has a face value of $1,000, a current market price of $1,089, and a 5 percent coupon. Which one of the following statements is correct concerning this bond?
A)The current coupon rate is greater than 5 percent.
B)The bond is a money market instrument.
C)The bond will pay less annual interest now than when it was originally issued.
D)The current yield is less than the coupon rate.
E)The bond will pay semi-annual payments of $50 each.

Question

Quizplus · Accepted Answer

The current yield is calculated by dividing the annual interest payment by the current market price. Since the bond has a 5 percent coupon rate but is selling at a premium, its current yield would be less than 5 percent. Hence, option D is correct. Option A is incorrect because the current coupon rate is the same as the stated coupon rate of 5 percent. Option B is incorrect because a bond with a 3-year maturity is not considered a money market instrument. Option C is incorrect because the annual interest payments will remain the same at $50, as this is based on the face value and coupon rate of the bond. Option E is correct, but it is not the best choice as it is not directly related to the question.

Assume a Semi-Annual Coupon Bond Matures in 3 Years, Has