Explanation

For a bond trading at a premium (above par value):

1. Current Yield = Annual Coupon Payment / Current Market Price
2. Coupon Rate = Annual Coupon Payment / Par Value

When a bond trades at a premium:

• Current Market Price > Par Value
• Since the denominator in the current yield calculation (market price) is larger than the denominator in the coupon rate calculation (par value)
• The current yield will be less than the coupon rate

Example:

• Par value = $1,000
• Coupon rate = 5% → Annual coupon = $50
• Market price = $1,100 (premium)
• Current yield = $50 / $1,100 = 4.55%
• 4.55% < 5% (coupon rate)

This relationship holds true because the bond's price is higher than its face value, so the same coupon payment represents a smaller percentage return relative to the higher purchase price.