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Basic Question 5 of 10
The yield to maturity is greater than the current yield when ______
B. the bond is selling at a discount.
C. Never; the yield to maturity is always less than the current yield.
A. the bond is selling at a premium.
B. the bond is selling at a discount.
C. Never; the yield to maturity is always less than the current yield.
User Contributed Comments 8
| User | Comment |
|---|---|
| haarlemmer | one way to memorize it is because the YTM could compensate the current yield, the bond could be sold at discount. At premium means market could accept lower ytm than current yield. hope it may be helpful |
| cwrolfe | Also, you can remember that the current yield is always between the YTM and the COUPON (when not priced at par of course). |
| steved333 | YTM is assumed to be longer than CY, and therefore more sensitive to the changes in price. P down, CY up, YTM up more. P up, CY down, YTM down more. |
| SaeedAlam | Very intuitive thanks steve |
| kpischinas | VG Steve |
| robbiecow | 1. If a bond is selling below par, its yield to maturity will be greater than its current yield, which in turn will be more than the coupon rate. 2. If a bond trades at a premium, its coupon rate will be greater than its current yield, which will be more than its yield to maturity. 3. If a bond trades at par, its yield to maturity will be equal to both the current yield and the coupon rate. |
| robbiecow | If you have a 10 year 5% coupon bond that was issued at par ($1,000), then the interest rate is 5%. Now consider that rates have gone up to 6% (i.e., trading at a discount); this makes the bond worth less then par. New price = $926.40. The current yield is 5.40% ($50/$926.40). Therefore, YTM > CY > Coupon Rate Going the other way where YTM drops to 4% (i.e., trading at a premium). The bond is now priced at $1,081.11 with a CY of 4.62%. Therefore, Coupon > CY > YTM. Hope this helps |
| rumshine | Thanks for the explanation and example robbiecow. |
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Craig Baugh
Learning Outcome Statements
compare, calculate, and interpret yield and yield spread measures for fixed-rate bonds
CFA® 2024 Level I Curriculum, Volume 4, Module 7.