Question

Which of the following $1,000 face value securities has the highest yield to maturity?

(a) A 5 percent coupon bond selling for $1,000

(b) A 10 percent coupon bond selling for $1,000

(c) A 15 percent coupon bond selling for $1,100

(d) A 15 percent coupon bond selling for $900

justify answer

Answer 1

a. The yield to maturity will be equal to coupon rate of 5%, since the bond is selling at its par value.

b. The yield to maturity will be equal to coupon rate of 10%, since the bond is selling at its par value.

c. The yield to maturity will be less than the coupon rate of 15%, since the bond is selling at premium i.e. above par value.

d. The yield to maturity will be more than the coupon rate of 15%, since the bond is selling at discount i.e. below par value.

So, the correct answer is option d.

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