Which statement regarding bond yields is true?

Question

Quizplus · Accepted Answer

When a coupon bond is selling at par, it means the bond's price is equal to its face value. In this case, the coupon rate on the bond equals the yield to maturity, and the bond's current yield equals its yield to maturity. Hence, Option D is correct.

Option A is incorrect because, when a coupon bond is selling at a premium, the bond's current yield is lower than the yield to maturity.

Option B is incorrect because the yield to call only measures the expected return on the bond if it is called according to the issuer's option, which may or may not happen. Therefore, yield to maturity is a better measure of the expected return.

Option C is incorrect because the current yield only measures the annual income from a bond in relation to its current market price, whereas the yield to maturity measures the total expected return on a bond, including capital gains or losses, over its entire life. Therefore, we cannot infer the relative yields to maturity of two bonds based only on their current yields.

Which Statement Regarding Bond Yields Is True