Question

Which one of the following statements is true about a $1,000, 6% annual coupon bond that is selling for $1,012? The yield-to-maturity is greater than 6%. The current yield is less than 6%. The yield-to-maturity is 6%. The current yield is 6%.

Answer 1

Answer:

The correct statement  is "the current yield is less than 6%".

Explanation:

A bond only sells at a premium if the yield to maturity is less than the coupon rate. So the first statement is false.

Current Yield =$\frac{Annual Coupon}{Current Bond Price} =\frac{60}{1,012}=0.059$. The second statement is correct.

If the yield to maturity is equal to the coupon rate, the bond should be selling at par i.e the market price of the bond should be $1,000, therefore the 3rd statement if incorrect.

The current yield can only equal the coupon rate if the bond is selling at par. Therefore the last statement is incorrect.