Question

A 30-year Treasury bond is issued with a face value of $1,000 and makes coupon payments of $20 every six months. If relevant market yields decrease shortly after the Treasury bond is issued, what happens to the bond’s coupon rate, current yield, and yield to maturity?

all three increase

all three decrease.

the coupon rate increases, the current yield increases, and the yield to maturity decreases.

the coupon rate stays the same, the current yield decreases, and the yield to maturity decreases.

the coupon rate stays the same, the current yield increases, and the yield to maturity increases.

Answer 1

If the Market yield decrease shortly after the Treasury bond is issued then automatically it lowers or decreases the yield to maturity or the expected returns of the bondholders. Yield to Maturity is inversely proportional to the price of the bond hence Price of the bond rises since it has to compensate its debt holders for the lowering of the return it offers. So the current yield (Annual Interest / Price of the bond) will be lowered too. Since the bond is already issued hence coupon rates cannot be lowered further and hence it remains the same all through.

So the correct option is the option (d) which states that “the coupon rate stays the same, the current yield decreases, and the yield to maturity decreases.”