Question

True/ False Explain: A bond with a $100 annual interest payment with five years to maturity...

  1. True/ False Explain: A bond with a $100 annual interest payment with five years to maturity (not expected to default) would sell for a premium if interest rates were below 9 percent and would sell for a discount if interest rates were greater than 11 percent.

Homework Answers

Answer #1

Whenever a Bond whose coupon rate is equal to the YTM always trades at par value.

Whenever a Bond whose coupon rate is greater than YTM always trades at premium.

Whenever a Bond whose coupon rate is lower than YTM always trades at discount.

In the present case, coupon rate is 10% ($ 100 / $ 1,000) will be greater than 9% and the bond shall trade at a premium and if the interest rate of 11% will be greater than the coupon rate of 10%, hence the bond will trade at discount.

So, the given statement is a true statement.

Do ask in case of any doubts.

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