Which of the following statements is CORRECT?
A) if a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative.
B) if a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity.
C) the current yield on bond a exceeds the current yield on bond b. therefore, bond a must have a higher yield to maturity than bond b.
D) if a coupon bond is selling at par, its current yield equals its yield to maturity.
E) if a coupon bond is selling at a premium, then the bond's current yield is zero.

Question

Quizplus · Accepted Answer

When a coupon bond is selling at par (equal to its face value), the coupon rate is equal to the yield to maturity which is also equal to the current yield. Therefore, the statement in choice D is correct.

Choices A, B, C, and E are incorrect. The expected capital gains yield on a discount bond is positive, not negative (choice A). The yield to call is only relevant if the bond is callable, and it may not be a better measure of expected return than yield to maturity (choice B). The current yield only reflects the coupon payments as a percentage of the bond’s current market price and does not directly reflect the yield to maturity (choice C). When a coupon bond is selling at a premium, the current yield is lower than the yield to maturity (choice E).

Which of the Following Statements Is CORRECT