Question

Which of the following statements is most correct? a. All else equal, if a bond's expected yield to maturity decreases, its price will fall. b. All else equal, if a bond's yield to maturity increases, its current yield will fall. c. If a bond's yield to maturity exceeds the coupon rate, the bond will sell at a premium over 4. par d. All of the statements above are correct e) None of the statements above is correct

Why is all incorrect

Answer 1

Answer: Option-(e): None of the statements above is correct Reason: Option-(a) is inccorrect because there is an inverse relation between yield to maturity rate and bond prices. When bond's yield to maturity increases, bond price decreases; when yield to maturity decreases, bond price increases. Therefore, if a bond's expected yield to maturity decreases, the present value of the payments to be received by the bondholders increases and as a result, bond price too increases. Option-(b) is incorrect because if bond's yield to maturity increases, bond price will decrease (Ref. explanation for option-(a)). Bond's current yield is calculated by dividing bond's periodic coupon payment/bond's current price. When bond price decreases, the numerator used is low which will result current yield on bond to increase Option-(c) is incorrect because There is an inverse relationship between bond's coupon rate and yield to maturity. Yield to maturity is nothing but the market interest rate or expected return on bond by investors. If the yield to maturity is higher than coupon rate, bonds will be issued at discount to attract more customers; If the yield to maturity is lower than coupon rate, bonds will be issued at premium to as demand will more among the investors; If yield to maturity is equal to coupon rate, bonds will be issued at par obviously as both coupon rate and yield to maturity are equal which implies that bond's coupon rate exactly satisfies investors' expected return on such bonds.