Question

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?
a. The bond is selling below its par value.
b. The bond is selling at a discount.
c. If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.
d. If the yield to maturity remains constant, the bond’s price one year from now will be higher than its current price.
e. The bond’s current yield is greater than 9%.

Answer 1

Answer:

c. If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.

Explanation:

Yield to maturity is the total effective return the bond provides in its whole life. This basically shall be more than the coupon rate offered by the bond. But since it is less than the coupon rate - people will only buy the bond at a price less than the issue price.

This is because if people can not get a better return then how can they pay better.

Similarly the price will be less than the current price offered.