Question

For a discount bond, the current yield is _____ the yield to maturity, and the coupon rate is ____ the yield to maturity. Select one:

A. a less than greater than
B. greater than; greater than
C. equal to; equal to
D. greater than: less than
E. less than; less than

Answer 1

The answer is D. For a discount bond, the current yield is greater than the yield to maturity, and the coupon rate is less than the yield to maturity.

Step-by-step explanation:

For a discount bond, the current yield is greater than the yield to maturity, and the coupon rate is less than the yield to maturity. The correct answer to the question is D. greater than; less than. When a bond is purchased at a discount (less than its face value), the yield to maturity includes not only the coupon payments but also the capital gain realized when the bond matures at its face value.

As a result, the coupon rate, which is the annual coupon payment divided by the face value of the bond, remains constant and is less than the yield to maturity if the bond was bought at a discount. Since the current yield is calculated as the annual coupon payment divided by the market price of the bond, and because the bond is at a discount, the current yield is higher than the yield to maturity.