connect FINANCE Homework 7 Chapter 6 Question 4 (of 20) value: 2.50 points MC Qu
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connect FINANCE Homework 7 Chapter 6 Question 4 (of 20) value: 2.50 points MC Qu. 36 The yield to maturity on a discount bond is:.. The yield to maturity on a discount bond is: O greater than both the current yield and the coupon rate. O less than the current yield but greater than the coupon rate. O equal to both the coupon rate and the current yield. O equal to the current yield but greater than the coupon rate less than both the current yield and the caupon rate. References Multiple Choice Dimiculty Medium MC Qu. 36 The yield to maturity on a discount bond bond values and why they Ructuote Legning Objective: 06-02 Describe 4Explanation / Answer
When the market price of a bond is above par then it's called a premium bond. Similarly when a bond sells for less than par, called a discount bond.
Actually when a bond is issued, the issuing entity determines its duration, the par value and the rate of interest it pays which is commonly known as the coupon rate. These things are mostly unaffected by changes in the market value of a bond and remain stable over time.
The current yield of a bond is calculated by dividing the annual coupon payment by the current market value of the bond and this formula is based on the purchase price rather than the par value. This is a more accurate reflection of the profitability of a bond.
The YTM formula is a more complicated calculation that renders the total amount of return generated by a bond based on its par vakue, purchase price, duration, coupon rate and the power of compound interest
Hence its clear that when a bond's marjet price is above par, its current yield and YTM are lower than its coupon rate. Similarly when a bond is a discount bond, its current yield and YTM are higher than the coupon rate. Only when a bond sells for its exact par value are all three rates identical.
So, the yield to maturity on a discount bond is less than the current yield but greater than the coupon rate.
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