FRM Part I · FRM Exam Part I · Interest Rates
A 5-year bond with an 8% annual coupon and a face value of 100 trades at 105. Which ordering of the coupon rate, the current yield and the yield to maturity is correct?
For a premium bond, the coupon rate is highest, then the current yield (8/105, about 7.62%), then the yield to maturity. The yield to maturity is lowest because the price falls to par at maturity, which reduces the total return below the current yield.
- ACoupon rate > current yield > yield to maturityCorrect
- BYield to maturity > current yield > coupon rate
- CCurrent yield > coupon rate > yield to maturity
- DCoupon rate > yield to maturity > current yield
Explanation
Current yield = 8/105 = 7.62%, which is below the 8% coupon rate. For a premium bond, the yield to maturity is lower still because it also reflects the 5-point capital loss to par at maturity. The ordering is coupon > current yield > YTM. The reverse ordering applies to a discount bond.
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