Question

Consider an annual coupon bond with a $1000 par value and 5 years to maturity. The...

Consider an annual coupon bond with a $1000 par value and 5 years to maturity. The yield to maturity is 8% and the coupon rate is 10%. If the yield to maturity is held constant, which of the following can be inferred about this bond?

this bond is selling at a premium and the price will increase with time

this bond is selling at a discount and the price will increase with time

this bond is selling at a discount and the price will decrease with time

this bond is selling at par and the price will remain constant

this bond is selling at a premium and the price will decrease with time
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Answer #1

Since the Coupon is higher than the YTM, the Bond must be trading at a premium because when a bond pays more with coupon than the previaling market interest, the Bond becomes attractive and it demand increases and thus it trades at a premium.

The Bond values always move towards it's par value as the time passes, So the bond value will decrease and come down to Par Value which is 1000.

So, Option E is correct. this bond is selling at a premium and the price will decrease with time.

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