If you are holding a premium bond, you must expect a ________ each year until maturity. If you are holding a discount bond, you must expect a ________ each year until maturity. (In each case assume that the yield to maturity remains stable over time.)

Question

Quizplus · Accepted Answer

Premium bonds are purchased above their face value, so as they approach maturity, their value decreases towards the face value, resulting in a capital loss. Discount bonds are purchased below their face value, and as they approach maturity, their value increases towards the face value, resulting in a capital gain.

If You Are Holding a Premium Bond, You Must Expect