Question

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, an 8% yield to maturity, and are noncallable. Which of the following statements is correct?
a) Bond A's current yield is greater than that of Bond B.

b) If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value.

c) Bond A trades at a discount, whereas Bond B trades at a premium.

d) If the yield to maturity for both bonds remains at 8%, Bond A's price one year from now will be higher than it is today, but Bond B's price one year from now will be lower than it is today.

e) Bond A's capital gains yield is greater than Bond B's capital gains yield.

Answer 1

Answer:

a) Bond A's current yield is greater than that of Bond B.

TRUE As every other alternative as been proveed incorrect

Also, this satement refers to the amount stated in the coupon rate.

Explanation:

c) Bond A trades at a discount, whereas Bond B trades at a premium.

FALSE

A trades as premium as thei coupon rate is higher than market value so investor are willing to purchase at a hihger price until achieve the 8% return

d) If the yield to maturity for both bonds remains at 8%, Bond A's price one year from now will be higher than it is today, but Bond B's price one year from now will be lower than it is today.

FALSE As A is traded at premium it will decrease over time to match the face value

e) Bond A's capital gains yield is greater than Bond B's capital gains yield.

FLASE As Bond A will decrease their price over time it will make capital losses.