Which of the following statements best describes bonds?

Question

Quizplus · Accepted Answer

The current yield of a bond is equal to its annual interest payments divided by its current market price, while the yield to maturity represents the total return an investor can expect from holding the bond until it matures, taking into account both the coupon payments and any capital gains or losses. If a coupon bond is trading at its par value, its coupon rate is equal to the prevailing market interest rate, so its current yield and yield to maturity are equal.

B is incorrect because if a coupon bond is selling at a discount, its price will continue to rise as it approaches maturity and converges to its par value, not decline.

C is incorrect because the duration or sensitivity of a bond's price to changes in interest rates depends on its time to maturity, coupon rate, and yield to maturity, rather than whether it is a coupon or zero coupon bond. Generally, the longer a bond's maturity and the lower its coupon rate or current yield, the more it will be affected by changes in interest rates.

D is incorrect because if a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a discount, rather than a premium. A bond's price is inversely related to its yield, so a higher yield implies a lower price, and vice versa.

Which of the Following Statements Best Describes Bonds