The current yield tends to overstate a bond's total return when the bond sells for a premium because:
A) the bond's price will decline each year.
B) coupon payments can change at any time.
C) bonds selling for a premium have low default risk.
D) taxes must be paid on the current yield.

Question

Quizplus · Accepted Answer

Current yield only takes into account the annual coupon payments and does not consider any capital gains or losses that may arise from buying a bond at a premium (or discount). Over time, the bond's price will decline towards par value, resulting in a capital loss that reduces the total return of the investment.

The Current Yield Tends to Overstate a Bond's Total Return