Question

9. Lexington Homes, Inc. is preparing a bond offering with a coupon rate of 7 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct?

		The bonds will pay 10 interest payments of $70 each.
		The bonds will sell at a premium if the market rate (yield to maturity) is 6 percent.
		The bonds will become discount bonds if the market rate of interest (yield to maturity) declines.
		The bond will initially sell for $1030.

Answer 1

Option B The bonds will sell at a premium if the market rate (yield to maturity) is 6 percent. because the interest rate in market is 6% and this particular bond is paying 7% which means the bond is paying higher interest than the bonds on the market which makes the bond to trade at premium

Option A is incorrect because bond is paying coupon semi annually which means it makes 20 interest payments

Option C is incorrect because bonds become premium bonds if the Yield declines

Option D is incorrect because bonds is selling at par value which is $1000