You currently own a bond you purchased at par when it was issued ten years ago.
ID: 2757574 • Letter: Y
Question
You currently own a bond you purchased at par when it was issued ten years ago. The bond has a 7 percent annual coupon and matures 5 years from now. Which one of the following statements applies to this bond if the relevant market interest rate is now 4.8 percent?
The current yield-to-maturity is greater than 7 percent.
The current yield is 7 percent.
The next interest payment will be $35.
The bond is currently valued at one-half of its issue price.
You will realize a capital gain on the bond if you sell it today.
The current yield-to-maturity is greater than 7 percent.
The current yield is 7 percent.
The next interest payment will be $35.
The bond is currently valued at one-half of its issue price.
You will realize a capital gain on the bond if you sell it today.
Explanation / Answer
You will realize a capital gain on the bond if you sell it today
Since the market interest rate is less than coupon rate bonds will sell at a premium. Thus we will realise a capital gain if the bonds are sold today.
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