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Series 7 practice questionmediumDebt Securities — Bond Yields — Yield Relationships

For a bond trading at a discount, which of the following correctly ranks the yield measures from lowest to highest?

  1. AYTM < Current Yield < Nominal Yield
  2. BNominal Yield < Current Yield < YTM✓ Correct answer
  3. CCurrent Yield < Nominal Yield < YTM
  4. DNominal Yield < YTM < Current Yield
Explanation

Why B — Nominal Yield < Current Yield < YTM

For a discount bond: Nominal Yield (coupon rate) is lowest because it's fixed based on par value. Current Yield is higher because the same coupon is divided by a lower market price. YTM is highest because it includes both the current yield and the capital gain that will be realized when the bond matures at par. This relationship reverses for premium bonds.

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