Suppose a coupon bond with a par value of $1000 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 $1000 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 is calculated as the annual coupon payment divided by the current market price, i.e. $40/$950 = 0.0421 or 4.21%. Coupon rate is the annual interest payment as a percentage of the bond's par value, i.e. $40/$1000 = 0.04 or 4%. Since the current yield is higher than the coupon rate, it means that the bond is selling at a discount, and investors are earning a higher return than the coupon rate. Therefore, choice A is correct. Choices C and D cannot be determined from the given information.

Suppose a Coupon Bond with a Par Value of $1000