Question

If a bond is currently sold at a premium, and is said to decrease in value in the next year, what is the order of coupon, current yield, and yield to maturity?

Coupon > Yield to Maturity > Current yield.

Coupon > Current yield > Yield to Maturity

I know by definition of premium, the coupon rate is higher than the current yield, so I'm mainly asking whether knowing that the value will decrease will make the current yield be greater or less. Thank you!

Answer #1

If a bond is selling at a premium, then the price of bond is greater than the face value of bond. If price of bond is greater than the face value of bond, then the yield to maturity is lower than the coupon rate.

Current yield is the ratio of annual coupon and current price of bond. Current yield will be equal to the coupon rate if price of bond is equal to the face value of bond.

When the Current price of bond is greater than the face value of bond, current yield will be smaller than the coupon rate.

If price of bond is decreasing, so, current yield will increase until coupon rate.

So, the order is Coupon Rate > Coupon Rate > Yield to Maturity

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