The current yield tends to understate a bond's total return when the bond sells for a discount because:
A) increases in interest rates will increase the current yield.
B) the bond's price will increase each year.
C) current yields show only nominal returns.
D) the bond may have a higher face value.

Question

Quizplus · Accepted Answer

When a bond sells for a discount, the current yield only takes into account the interest payments relative to the discounted price of the bond. However, as the bond approaches maturity, its price will gradually increase towards its face value, resulting in additional capital gains that contribute to the bond's total return. Therefore, the current yield understates the bond's total return.

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