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Chapter 4: Q.10 (page 134)

True or False: With a discount bond, the return on the bond is equal to the rate of capital gain.

Short Answer

Expert verified

True, with a discount bond, the return on bond is equal to the rate of capital gain.

Step by step solution

01

Step 1. Introduction 

A bond is a debt instrument issued by governments or businesses to raise funds. Bondholder is a person who holds bonds. By purchasing a bond, the investor lends money to the bond issuer and in return gets the principal amount back along with interest upon maturity of the bond.

02

Step 2. Explanation

The current yield plus the rate of capital gain. A discount bond has no coupon payments by definition, hence the current yield for a discount bond is always zero (zero coupon payment divided by current price).

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Most popular questions from this chapter

Consider a bond with a 6% annual coupon and a face value of $1,000. Complete the following table. What relationships do you observe between years to maturity, yield to maturity, and the current price?

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