Which of the following statements is CORRECT?

Question

Quizplus · Accepted Answer

When a bond's yield to maturity increases, its price falls because investors demand a higher rate of return to compensate for the lower interest payments. This means that the bond needs to be sold at a discount to make up for the difference in interest payments. Therefore, option B is correct. Option A is incorrect because a bond selling at par means its coupon rate and yield to maturity are the same. Option C is incorrect because a bond selling at a premium means its coupon rate is higher than its yield to maturity. Option D is incorrect because a bond's current yield is calculated as its annual coupon payment divided by its market price, and the yield to maturity is the total return an investor can expect if they hold the bond until maturity. Option E is correct because a zero coupon bond does not have interest payments, so its current yield and yield to maturity are the same.

Which of the Following Statements Is CORRECT