QuestionJune 15, 2025

If the coupon rate on an outstanding bond is lower than the relevant current interest rate then the yield to maturity will be: lower than current interest rates. equal to the coupon rate. higher than the coupon rate lower than the coupon rate

If the coupon rate on an outstanding bond is lower than the relevant current interest rate then the yield to maturity will be: lower than current interest rates. equal to the coupon rate. higher than the coupon rate lower than the coupon rate
If the coupon rate on an outstanding bond is lower than the relevant current interest rate then the yield to
maturity will be:
lower than current interest rates.
equal to the coupon rate.
higher than the coupon rate
lower than the coupon rate

Solution
4.6(199 votes)

Answer

Higher than the coupon rate. Explanation 1. Understand Bond Pricing When the coupon rate is lower than current interest rates, the bond price falls below its face value. 2. Yield to Maturity (YTM) Analysis YTM reflects the total return anticipated on a bond if held until it matures. It adjusts for the difference between the bond's purchase price and its face value. 3. Compare YTM with Coupon Rate Since the bond is priced below face value due to a lower coupon rate compared to current interest rates, the YTM must be higher than the coupon rate to compensate for the discount.

Explanation

1. Understand Bond Pricing<br /> When the coupon rate is lower than current interest rates, the bond price falls below its face value.<br /><br />2. Yield to Maturity (YTM) Analysis<br /> YTM reflects the total return anticipated on a bond if held until it matures. It adjusts for the difference between the bond's purchase price and its face value.<br /><br />3. Compare YTM with Coupon Rate<br /> Since the bond is priced below face value due to a lower coupon rate compared to current interest rates, the YTM must be higher than the coupon rate to compensate for the discount.
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