Which of the following statements is CORRECT?
A) 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.
B) On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.
C) If a coupon bond is selling at par, its current yield equals its yield to maturity.
D) The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B.
E) If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.

Question

Quizplus · Accepted Answer

When a coupon bond is selling at par, its coupon rate equals the yield to maturity. Therefore, the current yield is also equal to the yield to maturity. Option A is incorrect because a bond may be purchased with an expected capital loss if the investor believes that the bond's other features, such as its coupon rate or credit rating, justify the purchase. Option B is incorrect because a bond may not pay cash coupon interest but may still be purchased by an investor for its other features, such as its potential for capital gains. Option D is incorrect because the current yield only considers the annual interest payment as a percentage of the market price of the bond, whereas the yield to maturity considers both the annual interest payment and the potential capital gain or loss from holding the bond until maturity. Option E is incorrect because the yield to call only measures the expected return if the bond is called at the next call date, whereas the yield to maturity measures the expected return if the bond is held until maturity.

Which of the Following Statements Is CORRECT