If a bond with face value of $1,000 and a coupon rate of 8% is selling at a price of $1,070, which of the following regarding the bond's yield to maturity is correct?
Yield to maturity is less than 8%.
Yield to maturity is more than 8%.
Yield to maturity equals 8%.
None of the above is correct.
Bond Price:
It refers to the sum of the present values of all likely coupon
payments plus the present value of the par value at maturity. There
is inverse relation between Bond price and YTM ( Discount rate )
and Direct relation between Cash flow ( Coupon/ maturity Value )
and bond Price.
Price of Bond = PV of CFs from it.
If YTM > Coupon, Bond will trade at discount
If YTM = Coupon, Bond will trade at par
If YTM < Coupon, Bond will trade at Premium
In the given case, Bond is trading at premium. Hence YTM will be less than coupon Rate ( 8% ).
OPtion A is correct.
Get Answers For Free
Most questions answered within 1 hours.