Question

If a bond with face value of $1,000 and a coupon rate of 8% is selling...

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.

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Homework Answers

Answer #1

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.

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