Explanation:
Let's analyze each statement:
A. TRUE: When a bond sells at a premium (price > par), the YTM is less than the coupon rate. This is because investors are willing to pay more than face value, accepting a lower yield.
B. TRUE: When a bond sells at a discount (price < par), the YTM is greater than the coupon rate. The discount provides additional return to compensate for the lower price.
C. TRUE: For zero-coupon bonds, the YTM equals the spot rate for that maturity since there are no intermediate coupon payments to reinvest.
D. FALSE (The EXCEPT statement): This is not necessarily true. A bond with a higher YTM may have higher credit risk, different cash flow patterns, or other characteristics that make it riskier. The YTM alone doesn't determine investment superiority - risk must also be considered. Two bonds with identical maturities and term structure could have different YTMs due to credit quality differences, making the higher-YTM bond potentially riskier, not necessarily superior.
Therefore, statement D is the exception as it's not necessarily true about YTM.
Ultimate access to all questions.
Each of the following is necessarily TRUE about a bond's yield-to-maturity (YTM) EXCEPT:
A
A bond that sells at a premium to par has a yield (YTM) that is less than its coupon rate
B
A bond that sells at a discount to par has a yield (YTM) that is greater than its coupon rate
C
The yield (YTM) of a zero-coupon bond equals the spot (zero) rate of the bond's maturity
D
If the same term structure of spot rates applies to two bonds with identical maturities, the bond with the higher yield (YTM) is a superior investment
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