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Which of the following statements about bond prices is correct? The price of a bond is...

Which of the following statements about bond prices is correct?

  1. The price of a bond is always equal to its face value

  2. If the market interest rate for the bond (YTM) increases, the bond price will increase

  3. Ifthecouponyield(=couponrate)ishigherthanthemarketinterestrateforthebond(YTM), the price of the bond will be higher than 100% of the face value

  4. Ifthecouponyield(=couponrate)ishigherthanthemarketinterestrateforthebond(YTM), the price of the bond will be lower than 100% of the face value

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Answer #1

Which of the following statements about bond prices is correct?

  1. The price of a bond is always equal to its face value

  2. If the market interest rate for the bond (YTM) increases, the bond price will increase

  3. If the coupon yield(=coupon rate) is higher than the market interest rate for the bond(YTM), the price of the bond will be higher than 100% of the face value

  4. If the coupon yield(=coupon rate) is higher than the market interest rate for the bond(YTM), the price of the bond will be lower than 100% of the face value

Option 3. is correct.

If the coupon rate > YTM, the bond is said to be selling at a premium and it's price > 100% of face value. So, option 4 is incorrect.

Option 1 is incorrect because the price of the bond may be less than, equal to or greater than the face value depending upon the relationship between coupon rate and YTM

Option 2 is incorrect because If the market interest rate for the bond (YTM) increases, the bond price will decrease

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