Stephenson Co.'s 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?

Question

Quizplus · Accepted Answer

The bond's yield to maturity is the discount rate that equates the present value of all future cash flows from the bond to its current market price. Since the bond is selling at a discount, its yield to maturity must be greater than its coupon rate. Therefore, answer B is correct. The current yield is the bond's annual coupon payment divided by its current market price. If the bond's coupon rate is higher than its current yield, it means that the bond is selling at a discount, and vice versa. The bond's price will only remain at $850 if the yield to maturity stays constant and there are no changes in market conditions. Finally, we cannot determine whether the bond's current yield exceeds its yield to maturity or vice versa without additional information.