Question

Bond Apple is a par bond and Bond Banana is a discount bond. They pay the same annual coupons and have same face value and time to maturity. Which of the following is wrong?

a.apple's coupon rate is equal to its yield to maturity

b.banana's price is below its face value

c apple's current yield is equal to its yield to maturity

d banana's current yield is lower than its coupon rate

Answer 1

Given for 2 bonds,

Both pay the same annual coupons and have same face value and time to maturity.

Bond Apple is a par bond and Bond Banana is a discount bond

So, for a par bond, Its price equals to Face value and its coupon rate is same as its YTM. Also for a par bond, since price is equal to face value, their current yield is same as their coupon rate.

So, statement a and c are false.

For a discount bond, its price is less than the face value and its YTM is greater than its coupon rate.

So, statement b is false.

On statement d is correct. This is because current yield = coupon /price and coupon rate = coupon /face value.

So, when price is less than face value, current yield for the bond is higher.

So, Option d is right answer.