Question

Which of the following statements is CORRECT?

a. If a coupon bond is selling at a premium, then the bond's current yield is zero.
b. If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative.
c. If a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity.
d. The current yield on Bond A exceeds the current yield on Bond B. Therefore, Bond A must have a higher yield to maturity than Bond B.
e. If a coupon bond is selling at par, its current yield equals its yield to maturity.

Answer 1

E. If a coupon bond is selling at par, its current yield equals its yield to maturity

Step-by-step explanation:

At par means at face value. A bond may sell at par, below par or above par. A bond that trades at par has a yield that is equivalent to its coupon. Investors expect to have a return that is equal to the coupon for the risk of lending to the bond issuer.

The coupon rate of a bond is equal to its yield to maturity if the purchase price is equal to its par value or face value.

From the paragraph above, this makes option E the best answer for the question.