A bond with a face value of $1,000 has annual coupon payments of $100 and was issued 7 years ago. The bond currently sells for a premium and has 8 years left to maturity. This bond's ____ must be less than 10%.
I. yield to maturity
II. current yield
III. coupon rate

Question

Quizplus · Accepted Answer

The bond sells for a premium, which means its coupon rate is higher than the current market interest rate (yield to maturity). Since the coupon payments are $100 on a $1,000 face value bond, the coupon rate is 10%. For the bond to sell at a premium, its yield to maturity must be less than the coupon rate, so less than 10%. The current yield, which is the annual coupon payment divided by the current price of the bond, would also be less than the coupon rate since the bond is selling at a premium, indicating it is also less than 10%.

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