Question

Which of the following statement is most correct?

1. If a bond yield to maturity exceeds its coupon rate, the bond’s current yield must also exceed its coupon rate.
2. If a bond’s yield to maturity exceeds its coupon rate, the bond’s price must be less than its maturity value.
3. If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell the same price regardless of the bond’s coupon rate
4. Answers B and C are correct.
5. Both A and B are correct

Chris reuses to retire until her retirement account has a balance of at least $300,000. Chris also refuses to make any additional deposits into the account. The account currently has a balance of $100,000 and earns 4% per year, compounded quarterly.

1. 24 years and 3 months
2. 27 years and 7 months
3. 29 years
4. 119 years

Answer 1

1. Both A and B correct

IF YTM>Coupon rate then Bond Price < Maturity value(Par value), Thus, Current yield i.e (= current yield/Bond price) must exceed its coupon rate.

2. A. 27 years 7 months

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Α C D E F G H I 1 Current balance in account Annual interest rate Quarterly interest rate Required balance in account $100,000 4% 1% $300,000 Time reach goal 27.60 = 27 years 7 months

Cell reference -

ДА B DE F G H -Nm to Current balance in account 100000 Annual interest rate 0.04 Quarterly interest rate =C3/4 Required balance in account 300000 Time reach goal =NPER(C4,,C2,-C5,0)/4 = 27 years =C7*12-E7*12 months

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.