Question
Why is the YTM of a discount bond greater than the bond's current yield?
Multiple choice question.
YTM cannot be greater than the current yield.
The current yield does not include the capital gain from the price discount.
YTM reflects the additional risk of time to maturity.
YTM uses compound interest rather than simple interest to determine the yield.
Multiple choice question.
YTM cannot be greater than the current yield.
The current yield does not include the capital gain from the price discount.
YTM reflects the additional risk of time to maturity.
YTM uses compound interest rather than simple interest to determine the yield.
Answers
GPT-4o mini
The correct answer is:
**The current yield does not include the capital gain from the price discount.**
This is because the current yield only considers the bond's annual coupon payments relative to its current price, while the Yield to Maturity (YTM) incorporates both the income from coupon payments and the capital gain (or loss) that will be realized if the bond is held to maturity. For discount bonds, which are sold below their face value, YTM will be higher than the current yield due to this additional capital gain realized when the bond matures at its face value.
**The current yield does not include the capital gain from the price discount.**
This is because the current yield only considers the bond's annual coupon payments relative to its current price, while the Yield to Maturity (YTM) incorporates both the income from coupon payments and the capital gain (or loss) that will be realized if the bond is held to maturity. For discount bonds, which are sold below their face value, YTM will be higher than the current yield due to this additional capital gain realized when the bond matures at its face value.