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

When a bond sells at a discount, its yield to maturity must be greater than its coupon rate. Therefore, statement B is correct. The bond's current yield is calculated by dividing the annual coupon payment by the current price, and it is below the coupon rate, so statement C is incorrect. The bond's yield to maturity is the discount rate that equates the present value of all future cash flows to the current price, and it takes into account the time value of money, so it is more comprehensive than the current yield. Statement A is incorrect because the current yield is lower than the yield to maturity. Statement D is incorrect because if the yield to maturity stays constant and the bond approaches maturity, its price will gradually converge to its face value of $1,000. Statement E is incorrect because the coupon rate is lower than the current yield.