If a bond is selling for a premium,

Question

Quizplus · Accepted Answer

When a bond is selling for a premium, it means the bond's market price is higher than its face value. This typically occurs when the bond's coupon rate (the interest rate it pays) is higher than the current market interest rates. In this scenario, the current yield (annual interest payment divided by the bond's current price) will be lower than the yield to maturity (the total return anticipated on a bond if held until it matures), because the yield to maturity accounts for the bond's price converging to its face value over time. Therefore, the current yield exceeds the yield to maturity when a bond is selling at a premium.

If a Bond Is Selling for a Premium