SIE practice questionhardYield Calculations — Yield to Maturity
Rank the following yields from lowest to highest for a bond trading at a premium: nominal yield, current yield, yield to maturity (YTM).
- ACurrent yield < YTM < nominal yield
- BNominal yield < current yield < YTM
- CYTM < nominal yield < current yield
- DYTM < current yield < nominal yield✓ Correct answer
Explanation
Why D — YTM < current yield < nominal yield
For a premium bond (trading above par): YTM < current yield < nominal (coupon) yield. A premium bond was purchased above par, so the investor loses principal at maturity, which reduces YTM below current yield. Current yield is below nominal yield because the denominator (higher market price) reduces the ratio. Remember: for discount bonds, the order reverses.
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