Question

If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected to::_______
a. increase over time, reaching par value at maturity
b. exceed the face value at maturity
c. be less than the face value at maturity
d. decline over time, reaching par value at maturity

Answer 1

Answer:

a. increase over time, reaching par value at maturity

Explanation:

If current yield is more than coupon rate, it means that the bond price is less than par value, as time to maturity decreases bond value amortizes to par value. Thus, If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected to increase over time, reaching par value at maturity.