Hello Tutor,

For questions 1 & 2 below I think that both have the answer a. i.e. "It will increase"

However, I am kind of uncertain. Can you please help me clarify?

The reason why I think "it will increase" on both questions, because of "The Third Fundamental Principle (FP3): There is an inverse relationship between price and yield; if an asset's price increases, its return will decrease (and vice versa), holding other things constant" (Irons, p. 80).

Thank you.

1. If the yield to maturity on a bond increases, what will happen to the bond's current yield?

a. It will increase.

b. It will decrease.

c. It will remain the same.

d. There is not sufficient information to answer this question.

2. If the yield to maturity on a bond increases, what will happen to the bond's capital gains yield?

a. It will increase.

b. It will decrease.

c. It will remain the same.

d. There is not sufficient information to answer this question.

Reference

Irons, R. (2019). The fundamental principles of finance. Taylor & Francis Group.