Investor returns on a Bond par, corporate, discount, receive, interest

ashycal

An investor buys a 6% coupon 5-year corporate bond priced to yield 7%. If rates remain unchanged when the investor sells the bond in 2 years, the investor will receive a:

A) capital loss.

B) total return equal to the coupon yield.

C) capital gain.

Answer is C
Current yield of a bond = coupon payment / market price of bond. Bonds with a coupon lower than the prevailing interest rate will trade at a discount to par. If interest rates remain the same as the bond nears maturity the price will increase towards its par value. Thus, when they are sold, the investor will receive a capital gain.

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Since the rates remain unchanged during the 2 yrs the price of the bond does not change and hence the returns the investor earns is coupon yield. ..