Suppose a coupon bond with a par value of $1,000 is currently priced at $950 and has a coupon of $40.Which of the following is TRUE? A) current yield coupon rate B) current yield

Question

Suppose a coupon bond with a par value of $1,000 is currently priced at $950 and has a coupon of $40.Which of the following is TRUE?
A) current yield > coupon rate
B) current yield < coupon rate
C) Coupon rate has risen.
D) Coupon rate has declined.

Quizplus · Accepted Answer

Current yield = Annual coupon payment / Current market price

Current yield = $40 / $950 = 0.0421 or 4.21%

Coupon rate = Annual coupon payment / Par value

Coupon rate = $40 / $1,000 = 0.04 or 4%

Since the current yield is greater than the coupon rate, it suggests that the bond is selling at a discount to its par value, which is indicative of a decline in the coupon rate. Therefore, the correct answer is A.

Suppose a Coupon Bond with a Par Value of $1,000