Question

Yield to maturity on a bond is:

I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium
II. The discount rate that will set the present value of the payments equal to the bond price
III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity

Group of answer choices

I, II, and III

I and II only

II only

I only

Answer 1

Bond Price:
Price of Bond = PV of CFs from it discount at YTM.
If Coupon Rate > YTM, Bond will trade at premium

If Coupon Rate + YTM, Bond will trade at Par

If Coupon Rate < YTM, Bond will trade at discount

YTM assumes that intermediary Cfs are reinvested at YTM only.

Hence all three statements are correct.

Answer A is correct.