If a bond is selling at a discount, which of the following statements is correct?
A)The current yield must be greater than the coupon rate.
B)The coupon rate must be greater than the yield to maturity.
C)The bond must have a low bond rating.
D)All of these statements are correct.

Question

Quizplus · Accepted Answer

When a bond is selling at a discount, it means that its market price is lower than its face value. This happens when the market interest rates are higher than the coupon rate of the bond. As a result, investors demand a discount on the bond to compensate for the lower than market coupon rate. When the bond is selling at a discount, the current yield (annual coupon payment divided by market price) is higher than the coupon rate (fixed annual payment divided by face value). Therefore, statement A is correct. Statement B is incorrect as the yield to maturity, which takes into account both the coupon rate, the discount or premium, and the time to maturity, can be higher or lower than the coupon rate. Statement C is also incorrect as the bond rating is unrelated to the bond's market price.

If a Bond Is Selling at a Discount, Which of the Following