Premium Bond

For a bond trading at a premium, the yields from highest to lowest are:

1. A.Yield to maturity, then current, then nominalThis is the discount-bond ranking transplanted onto a premium bond. When the buyer pays more than par and is redeemed at par, the built-in capital loss drags yield to maturity to the bottom of the list rather than lifting it to the top.
2. B.They are all equalThe three measures converge only at par, where the purchase price equals the redemption amount and there is nothing to amortize. A premium price is the very condition that pulls them apart.
3. C.Current, then nominal, then yield to maturityCloser than most, since it correctly puts yield to maturity at the bottom. It breaks at the top: current yield divides the coupon by a price above par, which makes it smaller than the coupon, so it cannot outrank nominal. On a premium bond nominal leads.
4. D.Nominal, then current yield, then yield to maturityCorrect - premium bond yield ranking.

Why: On a premium bond: nominal (coupon) yield is highest, then current yield, then yield to maturity is lowest.

A 5% coupon bond trades at 125 (premium). Its yields rank:

1. A.Current > nominal > YTMPlacing YTM at the bottom is right, but current yield cannot outrank the coupon on a premium bond. Paying 1,250 to collect 50 of interest dilutes the return below the 5 percent stated rate, so nominal stays on top.
2. B.All equalThe three yields converge only when a bond changes hands at exactly par. This one trades at 125, and that 25-point premium is what forces the measures apart.
3. C.Nominal > current > YTMCorrect - premium-bond yield ranking.
4. D.YTM > current > nominalThis is the correct ladder for a discount bond, simply applied to the wrong side of par. A premium buyer will lose the extra 250 as the bond amortizes toward 1,000, which drags YTM to the bottom and leaves nominal at the top.

Why: For a premium bond, nominal yield is highest, then current yield, then YTM.