Assume a semi-annual coupon bond matures in 3 years,has a face value of $1,000,a current market price of $989,and a 5 percent coupon.Which one of the following statements is correct concerning this bond?
A) The current coupon rate is greater than 5 percent.
B) The bond is a money market instrument.
C) The bond will pay less annual interest now than when it was originally issued.
D) The current yield exceeds the coupon rate.
E) The bond will pay semi-annual payments of $50 each.

Question

Quizplus · Accepted Answer

The current yield exceeds the coupon rate because the bond is currently priced below its face value. The coupon rate is fixed at 5 percent and does not change, whereas the current yield reflects the current market price of the bond. The bond is not a money market instrument as it has a maturity of 3 years. The current coupon rate is 5 percent, so A is incorrect. The bond pays semi-annual interest, so E is correct. However, it is not relevant to the question being asked. Finally, we cannot determine if the bond will pay less annual interest now than when it was originally issued based on the information provided.

Assume a Semi-Annual Coupon Bond Matures in 3 Years,has a Face