When interest rates move from 9 to 10% per annum for a three-year bond paying a 9% per annum coupon,the:
A) coupon rate becomes higher than the current market yield
B) present value of the bond becomes higher than the face value
C) current yield becomes higher than the coupon rate
D) current price of the bond will increase

Question

Quizplus · Accepted Answer

When interest rates increase, the current yield of the bond will also increase. The current yield is calculated by dividing the annual coupon payment by the current market price of the bond. If the market interest rate (which determines the current yield) is higher than the coupon rate, the bond's price will decrease to compensate for the lower yield. Therefore, the current yield will be higher than the coupon rate when interest rates increase.

When Interest Rates Move from 9 to 10% Per Annum