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CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields

A fixed-rate bond with five years remaining trades at a discount to par. The ordering of its yield measures is most likely:

For a discount bond, the coupon rate is lowest, the current yield is higher, and the yield to maturity is highest. The price is below par, which lifts coupon over price above the coupon rate, and the pull to par adds a further gain captured only in yield to maturity.

  1. Acoupon rate < current yield < yield to maturityCorrect
  2. Bcurrent yield < coupon rate < yield to maturity
  3. Cyield to maturity < current yield < coupon rate

Explanation

For a discount bond, price is below par, so coupon divided by price exceeds the coupon rate, giving current yield above coupon rate. Yield to maturity also includes the capital gain from the discount, so it exceeds current yield. The other orderings describe premium bonds or are inconsistent.

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