Question

Bestest Company's bond, which has five years remaining until it matures, is currently selling for a discount. The band has a face value equal to 1 1,000. If market rates do not change for the next five years, what will be the annual Capital gains Yield investors who own Bestest's bonds earn each yeur until the bonds matritt? (a more information needede watu 6 The capital gains yield will be zero, because the valuo of the bond Should not change unless market interest rules Change (c. The capital gain yeild will be positive, because I the value of the bond must equal $1,000 at maturity, which means that the bonds market value must incrono euch your 6 The Capital gains yield will be negatie, bonuse the value of the bond must equal $2,ove at matumbo which means that the band's market value must delrense each yeurust

Answer 1

The correct answer is:-

C) The capital gains yield will be positive because the value of the bond must equal 1,000 at the maturity, which means that the bonds market value must increase each year.

As the bond is selling at a discount which is below the $1000 mark, and the redemption value is $1000, the bond must increase to the redemption amount.