CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Fixed-Rate Bonds
A fixed-rate bond is priced at a premium to par. Which relationship among the bond's coupon rate, current yield and yield to maturity is most likely correct?
For a premium bond, yield to maturity is below current yield, which is below the coupon rate. The high price lowers coupon divided by price, and the loss from pulling the price down to par at maturity lowers the yield to maturity further.
- ACoupon rate < current yield < yield to maturity
- BCurrent yield < coupon rate, and yield to maturity < current yield
- CYield to maturity < current yield < coupon rateCorrect
Explanation
For a premium bond, price exceeds par, so current yield (coupon/price) is below the coupon rate. YTM is lower still because the premium is amortized, reducing return over the bond's life. So YTM < current yield < coupon rate. Option A describes a discount bond.
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