Which of the following is correct for a bond investor whose bond offers a 5% current yield and an 8% yield to maturity?Select one:a.The bond is selling at a discount to par value.b.The bond has a high default premium.c.The promised yield is not likely to materialize.d.The bond must be a Treasury Inflation-Protected Security.
Question
Which of the following is correct for a bond investor whose bond offers a 5% current yield and an 8% yield to maturity?Select one:a.The bond is selling at a discount to par value.b.The bond has a high default premium.c.The promised yield is not likely to materialize.d.The bond must be a Treasury Inflation-Protected Security.
Solution
a. The bond is selling at a discount to par value.
Explanation: The current yield of a bond is calculated by dividing the annual coupon payment by the market price of the bond. The yield to maturity (YTM) is the total return anticipated on a bond if it is held until it matures. If the YTM is higher than the current yield, it means that the bond is selling at a discount to its par value. This is because the bond's price is lower than its face value, and the investor will receive a capital gain if the bond is held until maturity, in addition to the coupon payments. Therefore, option a is correct.
Similar Questions
Bond A is currently selling at par and has a yield of 5%. Bond B has the same coupon rate as A but is selling at a premium. Given this information, which of the following statements is correct. Bond B's coupon rate is below 5%. Bond B's coupon rate is above 5%. Bond B's yield is below 5%. Bond B's yield is above 5%.
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Which of the following is correct for a bond currently selling at a premium to par?Select one:a.Its current yield is higher than its coupon rate.b.Its current yield is lower than its coupon rate.c.Its yield to maturity is higher than its coupon rate.d.Its default risk is extremely low.
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Suppose a 10-year, $1000 bond with an 8% coupon rate and annual coupons is trading for a price of $1034.74. a. What is the bond’s yield to maturity? b. If the bond’s yield to maturity changes to 9% APR, what will the bond’s price be?
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