Question

Choose the CORRECT statement from the following:

Select one:

a. If a bond’s yield to maturity exceeds its coupon rate, the bond’s current yield must be less than its coupon rate.

b. All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.

c. If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of their coupon rates.

d. All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.

e. If a bond’s yield to maturity exceeds its coupon rate, the bond’s price must be less than its maturity value.

Answer 1

Option e is correct option YTM exceeds coupon rate Price will be lower.

Option a. is incorrect because when YTM is more than Coupon rate price of bond will be less . Hence current yield will be higher due to lower price of bond.

Option b is incorrect Interest rate changes affects lower coupon rate more than higher coupon rate

Option c is false because for same price coupon rate and YTM should be same.

Option d is false because interest rate affect is higher on higher maturity bond.

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