Question

What relationship exists between the investor’s required rate of return and the bond’s coupon rate that...

What relationship exists between the investor’s required rate of return and the bond’s coupon rate that will cause a bond to sell at a premium price?


Why would an investor pay a premium price for a bond in the secondary market when the bond is only worth $1,000 when it matures?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

a) When the bond is selling at a premium, its current price is above the face value. The bond can only sell at a premium when the bond's coupon rate is higher than the required rate of return.

b) The investor would pay a premium so that he will receive a higher coupon payment. Assume that most bonds offer the required rate of return which is 8% but there is an Amazon Bond which offers a coupon rate of 10%, the investor would be willing to pay a premium to acquire this bond so he can earn 2% more.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
What relationship exists between the investor’s required rate of return and the bond’s coupon rate that...
What relationship exists between the investor’s required rate of return and the bond’s coupon rate that will cause a bond to sell at a premium price? Why would an investor pay a premium price for a bond in the secondary market when the bond is only worth $1,000 when it matures?
What is the relationship between interest rate risk and bond’s coupon rate?
What is the relationship between interest rate risk and bond’s coupon rate?
A. Under what circumstances will a bond’s coupon rate exceed its coupon yield? Explain in economic...
A. Under what circumstances will a bond’s coupon rate exceed its coupon yield? Explain in economic terms why this occurs. B. A $100 par value bond has a coupon rate of 8 % and a coupon yield of 9 %. What is the bond’s market price? 3 Marks C. Griswold Travel has issued 6-year bonds that pay $30 in interest twice each year. The face value of these bonds is $1,000 and they offer a yield to maturity of 5.5...
#1. Expected Rate of Return: Par Value : $1,000 Coupon Rate : 8% Maturity period :...
#1. Expected Rate of Return: Par Value : $1,000 Coupon Rate : 8% Maturity period : 5 Years Market Price : 1,110 Instructions: Please using Trial and Error to find the expected rate of return with PVIFA and PVIF Table. # 2 : Duration Duration of a zero-coupon bond equals its maturity. It is only for zero-coupon bonds that duration and maturity are equal. Indeed, for any bond that pays some cash flows prior to maturity, its duration will always...
What is the relationship between bond prices and bond yields? For a standard coupon bond with...
What is the relationship between bond prices and bond yields? For a standard coupon bond with a face value of $1,000, if the YTM is equal to the coupon rate, what would the bond sell for? If the YTM is less than the coupon rate what would the bond sell for? If the YTM is greater than the coupon rate what would the bond sell for?
You are interested in purchasing a bond, your required rate of return is 9.5%, you find...
You are interested in purchasing a bond, your required rate of return is 9.5%, you find a bond that has a coupon rate of 8.5%, matures in 10 years, how much is the bond worth to you? If the bond is currently selling for $935.00 would you be willing to purchase it? Why or why not?
The process of bond valuation is based on the fundamental concept that the current price of...
The process of bond valuation is based on the fundamental concept that the current price of a security can be determined by calculating the present value of the cash flows that the security will generate in the future. There is a consistent and predictable relationship between a bond’s coupon rate, its par value, a bondholder’s required return, and the bond’s resulting intrinsic value. Trading at a discount, trading at a premium, and trading at par refer to particular relationships between...
A bond with a $1,000 face value and a 15 percent annual coupon rate matures in...
A bond with a $1,000 face value and a 15 percent annual coupon rate matures in 30 years. a. Determine the value of the bond to a friend of yours with a required rate of return of 11%. b. A zero coupon bond with similar risk is selling for $550. The bond has a face value of $1,000 and matures in 30 years. Your friend asks you which bond she should invest in, the zero coupon bond or the bond...
What is the difference between a bond’s coupon rate and its market interest rate (yield)?
What is the difference between a bond’s coupon rate and its market interest rate (yield)?
Consider 2 bonds. One is a 5-year bond with an 8% coupon, paid semiannually. The other...
Consider 2 bonds. One is a 5-year bond with an 8% coupon, paid semiannually. The other is a zero coupon, 20 year bond. a). What must be the required rate of return for the 5 year bond for it to sell at par value? b). If the required rate of return for the 5 year bond is 6%, does the bond sell at a premium or a discount? c). What is the price of the zero coupon bond if the...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT