Question

Explain why at the time of issuance, a corporate bond’s coupon rate equals or approximates the bond’s required rate of return (RRR) or yield-to-maturity (YTM)

Answer 1

A Corporate bond can be issued at par, discount or at premium.

(a) It is said to be at par if the purchase price is equal to the par value or face value of the bond. This happens when the stated coupon rate is equal to the Yield to Maturity (YTM).

(b) If the YTM is higher than the coupon rate then the purchase price is less than the face value and hence it is termed as issued at discount.

(c) If the YTM is lower than the coupon rate then the purchase price is greater than the face value at redemption and hence it is termed as issued at premium.

Remember that the coupon rate is always constant irrespective of the price the bond is trading at.

Hope this answers your question.