Question

Explain the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of a bond. ​ (Select the best answer​ below.) A. The market value of the bond approaches its par value as the time to maturity declines. The yield to maturity approaches the coupon interest rate as the time to maturity increases. B. The market value of the bond approaches its par value as the time to maturity increases. The yield to maturity approaches the coupon interest rate as the time to maturity increases. C. The market value of the bond approaches its par value as the time to maturity increases. The yield to maturity approaches the coupon interest rate as the time to maturity declines. D. The market value of the bond approaches its par value as the time to maturity declines. The yield to maturity approaches the coupon interest rate as the time to maturity declines.

Answer 1

Answer: D. The market value of the bond approaches its par value as the time to maturity declines. The yield to maturity approaches the coupon interest rate as the time to maturity declines.

Step-by-step explanation:

The par value of a bond refers to the amount(in dollar) a purchased bond will be worth when it attains maturity. Market value on the other hand is the actual amount or price of a given commodity at any point in time in the stock market. There may be fluctuations in the par value or market value of a bond, However, a bond holder is entitled to the par value of his bond irrespective of the purchase price. Therefore, the market value of a bond approaches it's par value as the time to maturity declines.

The coupon interest rate is the earning a bondholder can expect to get from holding a bond. While the yield to maturity is the annual rate of return of a bond if held till maturity and assumes that interest Payments are reinvested at the same interest rate as the original bond. The yield to maturity also approaches the coupon interest rate as the time to maturity declines.

Answer 2

D. The market value of the bond approaches its par value as the time to maturity declines. The yield to maturity approaches the coupon interest rate as the time to maturity declines.

Step-by-step explanation:

One explanation of the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of a bond, is that the market value of the bond approaches its par value as the time to maturity declines. The yield to maturity approaches the coupon interest rate as the time to maturity declines.

According to the definition of yield to maturity, it takes into consideration the coupon rate (i.e. the interest amount earned per year) for the number of years left to maturity, it is often higher because it treats the amount earned each year as being re-invested.

Therefore the amount of yield to maturity will fall as the time to maturity nears and will approach the coupon rate

Secondly, A bond's par value is the dollar amount it will be worth when it reaches maturity.

Before its maturity date, the bond may sell for more than par value on the secondary market as the yield it pays becomes more attractive to buyers.

Therefore the difference between par value and market value is the yield. hence as maturity nears, yield to maturity falls and market value approaches par value because the bond is what its par upon maturity.