Final answer:
If a bond's market price is lower than its face value, the yield to maturity is higher than the coupon rate. This is because the investor benefits from both the interest payments and the capital gain obtained when the bond matures.
Step-by-step explanation:
If a bond's market price is lower than the face value, its yield to maturity would be higher than the coupon rate. This happens because the investor is able to buy the bond at a discount, and will still receive the bond's full face value at maturity, assuming the issuer does not default. This increased earnings relative to the purchase price raises the bond's yield to maturity above the stated coupon rate.
The yield to maturity reflects the total return an investor will receive by holding the bond until it matures, considering all the interest payments and the capital gain or loss when the face value is repaid. It's different from the coupon rate, which is the interest rate the bond pays based on its original face value. When market interest rates rise, newly issued bonds will likely offer higher coupon rates, and existing bonds with lower coupon rates become less attractive, thus their market price falls and yield to maturity rises to match the new market conditions.