Most Accurate Statement Regarding Pricing and Yield of Bonds

A

Based on the information provided, Ron Logan, CFA, purchased $50 million worth of 6.0% coupon Southwest Manufacturing bonds at par three years ago. The bonds have a maturity period of nine years. Currently, the bonds are priced to yield 6.85%.

To determine the accurate statement regarding the pricing and yield of these bonds, we need to analyze the relationship between the coupon rate, market yield, and the bond's price.

A bond's price is influenced by its coupon rate and the prevailing market yield. When the coupon rate is higher than the market yield, the bond is considered to be trading at a premium. Conversely, when the coupon rate is lower than the market yield, the bond is trading at a discount.

In this scenario, the bond's coupon rate is 6.0%, and the market yield is 6.85%. Since the market yield is higher than the bond's coupon rate, we can conclude that the bonds are trading at a discount.

Now let's analyze the yield to maturity (YTM) since the purchase. YTM refers to the total return anticipated on a bond if it is held until its maturity date. It takes into account the bond's price, coupon payments, and the time remaining until maturity.

When the bond is trading at a discount, the YTM will be higher than the coupon rate because the investor has an opportunity to purchase the bond at a lower price and receive the par value at maturity. Conversely, when the bond is trading at a premium, the YTM will be lower than the coupon rate because the investor has paid more than the par value.

In this case, the bond is trading at a discount, which implies that the YTM has increased since the purchase. This is because when the bond price decreases, the effective yield of the bond increases. Therefore, the most accurate statement regarding the pricing and yield of these bonds is:

A. The bonds are trading at a discount, and the yield to maturity (YTM) has increased since purchase.