Question

4. Which of the following bonds has the highest yield to maturity? Please explain your answer.

A. $5,000 face value 1.95% coupon bond selling for $5,100

B. $1,000 face value 3% coupon bond selling for $9,998

C. $10,000 face value 2% coupon bond selling for $10,000

Answer 1

Note: I think in option B. Selling price amount given as 9,998 is a mistake. And actual amount is 998.

ANSWER IS OPTION B will get a higher YTM. It is because whenever a When bonds are sold at a price less than face value the bond is a Discount bond. And if bond is sold on discount YTM will be higher than its coupon rate.  Here Face value is 1000 and sells at 998.

In OPTION A bonds are sold at a premium, which means face value(5000) is lower than selling price(5100).Here YTM will be lower than coupon rate.

In OPTION C face value(10000)and selling price(10000)are equal hence its YTM and Coupon rate will be same.