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FRM Part I · FRM Exam Part I · Bond Yields and Return Calculations

A 3-year bond with a 4% annual coupon and face value 100 trades at a price of 95. Which ordering of its coupon rate, current yield and yield to maturity is correct?

The correct ordering is coupon rate below current yield below YTM. For a discount bond, the current yield (4/95 = 4.21%) exceeds the 4% coupon, and YTM is higher still because the investor also gains the pull to par at maturity.

  1. AYTM < current yield < coupon rate
  2. BCurrent yield < coupon rate < YTM
  3. CCoupon rate < YTM < current yield
  4. DCoupon rate < current yield < YTMCorrect

Explanation

The current yield is 4/95 = 4.21%, which is above the 4% coupon rate. The bond trades at a discount, so the investor also earns a pull to par of 5 over three years. That makes YTM higher than the current yield, at about 5.5%. The ordering is therefore coupon rate < current yield < YTM. The option with YTM below the coupon rate describes a premium bond.

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