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# Current yield and yield to maturity concepts

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American Fortunes is preparing a bond offering with an 8% coupon rate. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Given this, which of the following statements are correct?
(I.) The initial selling price of each bond will be \$1,000.
(II.) After the bonds have been outstanding for 1 year, you should use 9 as the number of compounding periods when calculating the market value of the bond.
(III) Each interest payment per bond will be \$40.
(IV) The yield to maturity when the bonds are first issued is 8%.

A. I and II only
B. II and III only
C. II, III, and IV only
D. I, II, and III only
E. I, III, and IV only

The total rate of return earned on a stock is comprised of which two of the following? (I) current yield (II) yield to maturity (III) dividend yield (IV) capital gains yield

A. I and II only
B. I and IV only
C. II and III only
D. II and IV only
E. III and IV only

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#### Solution Preview

American Fortunes is preparing a bond offering with an 8% coupon rate. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Given this, which of the following statements are correct?
(I.) The initial selling price of each bond will be ...

#### Solution Summary

Current yield and yield to maturity concepts are explored.

\$2.19
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## Concept

Which of the following statements is the most correct and why?

A.If a bond sells for less than par, then its yield to maturity is less than its coupon rate.
B. If a bonds sell at par, then its current yield will be less than yield to maturity.
C. Assuming that both are held to maturity and are equal risk, a bond selling for more than par with ten yrs to maturity will have a lower current yield and higher capital gain relative to bond that sells at par.
D.Anwers are A and C
E. None of the anwers above

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