Understanding Products and Their RisksDifficulty 3/5
A bond is trading below par. How do its nominal yield, current yield and yield to maturity compare?
- AYield to maturity is highest, then current yield, then nominal yield
- BNominal yield is highest, then current yield, then yield to maturity
- CCurrent yield is highest, then yield to maturity, then nominal yield
- DAll three are equal, because the coupon payment does not change with price
Show answer and rationale
Correct: A. At a discount the investor also collects the gain to par at maturity, so yield to maturity exceeds current yield, which exceeds the fixed nominal yield. The ranking inverts for a premium bond and converges at par.
- B — That is the ranking for a bond trading at a premium, where the investor absorbs a loss to par.
- C — Current yield ignores the gain to par, so it cannot exceed yield to maturity on a discount bond.
- D — They are equal only at par; a price below par separates all three.