Which of the following statements is most correct?
A) All else equal, if a bond's yield to maturity increases, its price will fall.
B) All else equal, if a bond's yield to maturity increases, its current yield will fall.
C) If a bond's yield to maturity exceeds the coupon rate, the bond will sell at a premium over par.
D) All of the answers above are correct.
E) None of the answers above is correct.

Question

Quizplus · Accepted Answer

When a bond's yield to maturity increases, it means that the bond's interest payments are less attractive compared to the prevailing market interest rates. As a result, investor demand for the bond decreases, leading to a decrease in its price. A bond's current yield is calculated by dividing its annual coupon payment by its market price, so a decrease in price would lead to an increase in current yield. However, this is not always the case as the coupon rate and time to maturity also affect the current yield. The statement in option C is incorrect as a bond with a yield to maturity exceeding the coupon rate is likely to be trading at a discount, not a premium.

Which of the Following Statements Is Most Correct