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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

Which \(10,000 bond has the higher yield to maturity, a 20-year bond selling for \)8,000 with a current yield of 20% or a 1-year bond selling for $8,000 with a current yield of 10%?

If interest rates decline, which would you rather be holding, long-term bonds or short-term bonds? Why? Which type of bond has the greater interest-rate risk?

Under what conditions will a discount bond have a negative nominal interest rate? Is it possible for a coupon bond or a perpetuity to have a negative nominal interest rate?

Would $200, which is to be received in exactly one year, be worth more to you today when the interest rate is 12% or when it is 17%?

If mortgage rates rise from 5% to 10% but the expected rate of increase in housing prices rises from 2% to 9%, are people more or less likely to buy houses?
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