CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to the nature of bonds?

I. For premium bonds, yield to maturity is always lower than its current yield.
II. For discount bonds, the duration equals the maturity of the bond.
III. Since longer-term interest rates are more stable than shorter term interest rates, longer term bonds are less price sensitive than shorter-term bonds.
IV. Not even U.S. government bonds are immune from interest rate risk.
A. I and IV
B. II and III
C. I, II, III and IV
Explanation: I is true. The reason a bond trades above par is because it is paying a coupon rate that is greater than what the market requires (which is represented through yield to maturity).

II is incorrect. The only instance where the bond duration equals its maturity is if the bond is a zero coupon bond, an extreme form of a discount bond.

User Contributed Comments 4

User Comment
DiscoAfro Is current yield the same as coupon rate? I thought current yield is the coupon divided by the bond value, i.e. price.
thekid DiscoAfro:
I was thinking the exact same thing.
Current yield = coupon/bond value
Therefore... current yield = ytm

Someone PLEASE correct me.
jpducros current yield = coupon/bond value but ytm is different
anaraguin coupon rate = nominal rate
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