A bond with a face value of $1,000 has annual coupon payments of $100 and was issued seven years ago.The bond currently sells for a premium and has eight years left to maturity.This bond's ________ must be less than 10%.

Question

Quizplus · Accepted Answer

The yield to maturity (YTM) and the current yield (CY) are both measures of the bond's return to the investor. The YTM is the total return expected from holding the bond until maturity, which takes into account both the coupon payments and the premium/discount at which the bond is selling. The CY, on the other hand, is the coupon payment expressed as a percentage of the current market price of the bond.

Since the bond is currently selling at a premium, its YTM must be lower than its coupon rate, which is 10% in this case. Moreover, since the coupon payment is fixed at $100 per year and the bond's market price is now higher than its face value, the CY must also be lower than the coupon rate. Therefore, the only choice that correctly associates both YTM and CY with the bond's premium status and coupon rate is E: "yield to maturity and current yield".

A Bond with a Face Value of $1,000 Has Annual