Question

Which of the following statements is correct?

A) The yield to maturity for a coupon bond that sells at its par value consists entirely of an interest yield; it has a zero expected capital gains yield.

B) Rising inflation makes the actual yield to maturity on a bond greater than the quoted yield to maturity which is based on market prices.

C) all of the above statements are false

D)On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.

E) The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm enters bankruptcy

Answer 1

The correct statement is:

A) The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.

The bond sells at par when the yield to maturity and the coupon rate is the same, thus if they keep being the same until maturity then the price of the bond will stay the same at $1000 till maturity. So there won't be any capital gains, as par value will be equal to the price of the bond and the bond will only earn interest yield.