Which of the following statements about bonds are correct?
(A) When a bond sells at a premium, coupon yield > current yield > yield to maturity.
(B) The redemption price of a bond is always equal to its face value.
(C) The coupon rate of a bond is the coupon payment as a percentage of its current market price.
(D) When a bond sells at par, the yield to maturity, the current yield and the coupon yield are all equal.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A) and (D) only
The coupon rate (coupon yield) is the coupon payment as a percentage of the face value, and the current yield is the same payment as a percentage of the market price. A bond sells at a premium when its market price is above its face value, and at a discount when it is below.
So a premium bond has coupon yield > current yield > YTM, a discount bond has the reverse order, and at par all three are equal; the redemption price is usually, not always, the face value.
Checking the statements
(A) When a bond sells at a premium, coupon yield > current yield > yield to maturity. — Correct. A price above face value makes the current yield smaller than the coupon yield, and the YTM smaller still.
(B) The redemption price of a bond is always equal to its face value. — Incorrect. It equals the face value only when redeemed at par; a bond redeemable at 110 pays 110% of the face value.
(C) The coupon rate of a bond is the coupon payment as a percentage of its current market price. — Incorrect. That is the current yield; the coupon rate is measured on the face value.
(D) When a bond sells at par, the yield to maturity, the current yield and the coupon yield are all equal. — Correct. At par the price equals the face value, so all three rates are the same.