Which of the following statements is CORRECT?
A) A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.
B) If a bond sells at par, then its current yield will be less than its yield to maturity.
C) If a bond sells for less than par, then its yield to maturity is less than its coupon rate.
D) A discount bond's price declines each year until it matures, when its value equals its par value.
E) Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par.The premium bond must have a lower current yield and a higher capital gains yield than the par bond.

Question

Quizplus · Accepted Answer

A bond's current yield is calculated as the annual interest payment divided by the current market price. If a bond sells at par, its current yield equals its coupon rate. If a bond sells at a discount, its current yield will be higher than its coupon rate but lower than its yield to maturity. If it sells at a premium, its current yield will be lower than its coupon rate but higher than its yield to maturity. Thus, the statement in A is correct as it accurately describes the relationship between a bond's current yield, its yield to maturity, and its coupon rate under different market conditions.

Which of the Following Statements Is CORRECT