Question

Of the following, identify the CORRECT statement. a. A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate. b. Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. The premium bond must have a lower current yield and a higher capital gains yield than the par bond. c. A discount bond's price declines each year until it matures, when its value equals its par value. d. A discount bond's price increases each year until it matures, when its value equals its par value. e. If a bond sells at par, then its current yield will be less than its yield to maturity.

Answer 1

A) A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.

Step-by-step explanation:

the yield to maturity = current yield +/- capital gains yield

current yield = yield to maturity +/- capital gains yield

the capital gains yield is positive or negative depending if the bond was sold at a premium or at a discount which results in a coupon rate being either higher or lower than the yield to maturity.

so the current yield must always be within a range between yield to maturity and coupon rate