Which of the following statements is CORRECT?
A)If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.
B)On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.
C)On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.
D)If a coupon bond is selling at par, its current yield equals its yield to maturity.
E)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.

Question

Quizplus · Accepted Answer

Option A is incorrect because if a bond is selling at a discount, the yield to maturity measures the investor's return in terms of both interest income and capital gains or losses at maturity, as the bond price will increase as it gets closer to maturity. Option B is incorrect because the expected capital gains yield may be negative if the bond's price is expected to decline, resulting in a total return that is less than the yield to maturity or yield to call. Option C is incorrect because the expected current yield may be zero if the bond is expected to pay no coupon interest, but the investor may still purchase the bond if its yield to maturity is attractive. Option E is incorrect because the current yield only measures the bond's coupon interest as a percentage of the current market price, whereas the yield to maturity reflects the bond's total return over its life, including interest income, capital gains or losses, and reinvestment of coupon payments. Bond A may have a higher current yield than Bond B due to a higher coupon rate, but it does not necessarily imply a higher yield to maturity, as Bond B may have a longer maturity or a higher expected capital gains yield. Therefore, option D is correct because if a coupon bond is selling at par, its current yield equals its yield to maturity, which represents the investor's total return over the bond's life assuming it is held to maturity.

Which of the Following Statements Is CORRECT