Question

Which one of these equations applies to a bond that currently has a market price that exceeds par value? C) Market value = Face value D) Current yield > Coupon rate B) Yield to maturity = Current yield A) Market value < Face value E) Yield to maturity < Coupon rate

Answer 1

Answer:

E) Yield to maturity < Coupon rate

Explanation:

As we all know that:

Bond's Yield = Coupon Payments  /  Market Price

If the market price has exceeded from the par value then the yield of bond will eventually fall from the previous level. In other words, as market value of bond is directly proportional to the coupon payments so we can say that the coupon rate increases the value of the bond.

Hence

Coupon rate >  Yield to maturity (If the market value is above par value)

If we change the sign, we have:

Yield to maturity < Coupon rate (Which is the option E)