Which of the following statements is CORRECT?
A) If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative.
B) If a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity.
C) 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.
D) If a coupon bond is selling at par, its current yield equals its yield to maturity.
E) If a coupon bond is selling at a premium, then the bond's current yield is zero.

Question

Quizplus · Accepted Answer

If a coupon bond is selling at par, this means its market price equals its face value. In this case, the bond's coupon payment and yield to maturity are equal, so the bond's current yield also equals its yield to maturity. Therefore, option D is the correct statement. Option A is incorrect because the capital gains yield can be positive, zero or negative, depending on the bond's price movements. Option B is incorrect because the yield to call is only relevant if the bond is callable and the issuer chooses to call it. Option C is incorrect because the current yield only measures the bond's coupon payment as a percentage of its current market price, while the yield to maturity takes into account the bond's cash flows and time to maturity. Therefore, a higher current yield does not necessarily imply a higher yield to maturity. Option E is incorrect because the bond's current yield will only be zero if the coupon payment equals the yield to maturity, which is not always the case for a bond selling at a premium.

Which of the Following Statements Is CORRECT