Question

Which one of the following statements is true? Question 13 options: 1) A premium bond has a yield to maturity that is less than the bond's coupon rate. 2) A discount bond has a coupon rate that is higher than the bond's yield to maturity. 3) The yield to maturity on a premium bond exceeds the bond's coupon rate. 4) The current yield on a par value bond will exceed the bond's yield to maturity. 5) The current yield on a premium bond is equal to the bond's coupon rate.

Answer 1

1. When the YTM < Coupon rate, the price of the bond > par value. That is the definition of a premium bond. So this statement is true.
2. For a discount bond the YTM > Coupon rate, and the price of the bond < par value. So this statement is false.
3. This is the opposite of the statement 1 and will result in a discount bond and not a premium bond. So this statement is false.
4. The current yield is calculated by dividing the coupon by the price of the bond. For a par value bond, the YTM = coupon rate and therefore the price = par value. So the current yield = yield to maturity. So this statement is false.
5. For a par value bond, the YTM < coupon rate and therefore the price > par value. So the current yield < yield to maturity. So this statement is false.