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NISM Certifications · NISM-Series-XV: Research Analyst · Terminology in Equity and Debt Markets

In the bond market, which statement about the relationship between price and yield to maturity (YTM) is correct?

A bond trades at a discount to face value when its yield to maturity is higher than its coupon rate. Bond prices and yields move inversely, so the price must fall below face value to give buyers the higher yield.

  1. AWhen YTM rises, the bond price rises
  2. BWhen YTM equals the coupon rate, the bond trades at a premium
  3. CWhen YTM is higher than the coupon rate, the bond trades at a discount to face valueCorrect
  4. DBond price and YTM are unrelated for fixed coupon bonds

Explanation

Price and yield move inversely. If the YTM exceeds the coupon rate, the bond must sell below face value to offer the higher return, i.e. at a discount. At YTM equal to coupon the bond trades at par.

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