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

Question

Quizplus · Accepted Answer

According to the definition of current yield, it is equal to the annual coupon payment divided by the current market price of the bond. Therefore, if a coupon bond is selling at par, then the current yield will be equal to the coupon rate, which is also equal to the yield to maturity. Thus, statement E is correct. Statements A, B, C, and D are incorrect as the current yield can be positive for a bond selling at a premium, a bond's expected capital gains yield can be positive even if the bond is selling at a discount, the yield to maturity is a better measure of expected return for a bond selling at a discount, and the relationship between current yield and yield to maturity cannot be determined based solely on the fact that one bond has a higher current yield than another.

Which of the Following Statements Is CORRECT