A 15-year bond with a face value of $1,000 currently sells for $850.Which of the following statements is CORRECT?
A) The bond's coupon rate exceeds its current yield.
B) The bond's current yield exceeds its yield to maturity.
C) The bond's yield to maturity is greater than its coupon rate.
D) The bond's current yield is equal to its coupon rate.
E) If the yield to maturity stays constant until the bond matures,the bond's price will remain at $850.

Question

Quizplus · Accepted Answer

Since the bond is selling at a discount (i.e., for less than its face value), its yield to maturity must be greater than its coupon rate. Choice A is incorrect because if the bond is selling at a discount, then its coupon rate must be less than its current yield. Choice B is incorrect because the opposite is true – the bond's yield to maturity is greater than its current yield. Choice D is incorrect for the same reason as choice A. Choice E is also incorrect because if the bond's yield to maturity stays constant, its price will increase over time as it approaches maturity, eventually reaching its face value.

A 15-Year Bond with a Face Value of $1,000 Currently