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Consider a $6,000 8-yr coupon bond with a 3.5% coupon rate. d.   Explain why the Current...

Consider a $6,000 8-yr coupon bond with a 3.5% coupon rate.

d.   Explain why the Current Yield is either greater than or less than the coupon rate.   (2)

      e.   Explain why the YTM is either greater than or less than the current yield.   (2)

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Answer #1

When the market yield increases, the bond price will fall. The cash flows are discounted at a higher rate. At a lower price, the bond’s yield to maturity will be higher. The higher yield to maturity on the bond is commensurate with the higher yields available in the rest of the bond market. Current yield = coupon payment/bond price. As coupon payment remains the same and the bond price decreases, the current yield increases.

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