CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

The yield to maturity is greater than the current yield when ______

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.
Correct Answer: B

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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