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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?

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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.

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