Question

1. A 10-year corporate bond has an annual coupon of 9% and a par value of $1,000. The bond is currently selling at a premium of 20% to par ($1,200). Which of the following statements is more likely to be CORRECT?

a.    The bond’s yield to maturity is 9%.

b.   The bond’s current yield is 9%.

c.    IF the bond’s yield to maturity remains constant over the next year, an investor owning the bond will earn a capital GAIN of 11% next year.

d.   IF the bond’s yield to maturity remains constant over the next year, an investor owning the bond will earn a capital LOSS next year.

e.    NO investor should be willing to buy this bond as the price is too high.

Answer 1

please find below the solution ...

correct statement is : d.   IF the bond’s yield to maturity remains constant over the next year, an investor owning the bond will earn a capital LOSS next year.

it will not be a) because bond is trading at premium therefore YTM will be lower than coupoun rate

It will not be b) because bond is trading at premium and current yield = 90/1200 and will not be 9%

it will not be c) because bond price next year will reduce to have 1000 at the maturity .. so it will not be capital gain

it will be d) because bond price will gradually fall and will give capital loss.

it will not be e) because its free market and price will match with supply.. there will not be situation of no trading..