Question

When a bond's price falls, its yield to maturity and its current yield?a.falls; falls b.rises; rises c.falls; rises d.rises; falls

Answer 1

Answer:

(B) rises; rises

Explanation:

There is an inverse relationship between a bond's price and its yield, be it its yield to maturity or its current yield. The relationship is evident is the pricing formula for a bond.

$Bond Price = ∑\frac{Coupon}{(1+y)^{n} }$

where y = the current yield of the bond (or yield to maturity)

n = the number or period of each coupon paid.

Thus, when a  bond'd price falls, its yield to maturity and current yield rise.

The yield to maturity of a bond is a single yield that equates the discounted values of all coupon and principal repayment of the bond to its current price. On the other hand, the current yield is the yield of the bond at a particular period and is influenced by the level of interest rate in an economy, the current rating of the bond, etc.