Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?
A) The face value of the bond has decreased.
B) The bond's maturity value exceeds the bond's price.
C) The bond's internal rate of return is 7%.
D)The bond's maturity value is lower than the bond's price.

Question

Quizplus · Accepted Answer

The current yield is calculated by dividing the annual coupon payment by the bond's price. If the current yield is less than the coupon rate, it means the bond is trading at a premium (face value is higher than the price) and if the current yield is greater than the coupon rate, it means the bond is trading at a discount (face value is lower than the price). Therefore, if the current yield is 7% and the coupon rate is 10%, the bond is trading at a discount, and the maturity value is lower than the price.

Which of the Following Statements Is Correct for a 10