Refering to the question below, if a bond is selling at a discount, its coupon rate (cpn/face value) is obviously lower than its current yield (annual cpn/price). I was mainly wondering other people’s thought process as to why the current yield is less than the YTM for a bond selling at a discount? I was thinking the current yield does not account for the increased reinvestment income while the YTM does?
Also for a bond selling at a premium whould the relationship be coupon rate>current yield>YTM.
A bond is selling at a discount relative to its par value. Which of the following relationships holds?
A) coupon rate < current yield < yield to maturity.
B) yield to maturity < coupon rate < current yield.
C) current yield < coupon rate < yield to maturity.
Your answer: A was correct!
When a bond is selling at a discount, it means that the bond has a larger YTM (discount rate that will equate the PV of the bond’s cash flows to its current price) than its current yield (coupon payment/current market bond price) and coupon payment.
Also for a bond selling at a premium whould the relationship be coupon rate>current yield>YTM.
A bond is selling at a discount relative to its par value. Which of the following relationships holds?
A) coupon rate < current yield < yield to maturity.
B) yield to maturity < coupon rate < current yield.
C) current yield < coupon rate < yield to maturity.
Your answer: A was correct!
When a bond is selling at a discount, it means that the bond has a larger YTM (discount rate that will equate the PV of the bond’s cash flows to its current price) than its current yield (coupon payment/current market bond price) and coupon payment.