Which of the following statements is correct?
A) Bond prices and interest rates move in the same direction,i.e. ,if interest rates rise,so will bond prices.
B) The market price of a discount bond will approach the bond's par value as the maturity date approaches.Barring changes in the probability of default,there is no way the value of the bond can fail to increase each year as the time to maturity approaches.
C) The "current yield" on a noncallable discount bond will normally exceed the bond's yield to maturity.
D) The "current yield" on a noncallable discount bond will normally exceed the bond's coupon interest rate.

Question

Quizplus · Accepted Answer

The current yield on a noncallable discount bond is calculated by dividing the annual coupon interest payment by the market price of the bond. As the market price of a discount bond approaches its par value as the maturity date approaches, the current yield increases. Therefore, the current yield will normally exceed the bond's coupon interest rate, which is fixed at the time of issuance.

Which of the Following Statements Is Correct