Current Yield Overstates the Return of Premium Bonds Since Investors

question 86

True/False

Current yield overstates the return of premium bonds since investors who buy a bond at a premium face a capital loss over the life of the bond.

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Definitions:

Par

The face value of a bond or stock, which is the amount the issuer agrees to pay back at maturity, often set at $100 for bonds.

SML Approach

Stands for Security Market Line, a graphical representation used in finance to demonstrate the relationship between risk and expected return of assets.

Systematic Risk

The risk inherent to the entire market or a market segment that cannot be mitigated through diversification, often influenced by factors like economic, political, and social changes.

Cost of Equity

The return a company requires to decide if an investment meets capital return requirements, often estimated using models like the Capital Asset Pricing Model (CAPM).