Question

QUESTION 8

A. If the coupon rate on a bond is 4%, and the bond is selling at a discount, the yield to maturity is

		higher than 4%
		lower than 4%
		equal to 4%

B. If the coupon rate on a bond is 7%, and the bond is selling at a premium, the yield to maturity is

		higher than 7%
		lower than 7%
		equal to 7%

C. If the coupon rate on a bond is 5%, and the bond is selling at its face value, the yield to maturity is

		higher than 5%
		lower than 5%
		equal to 5%

Answer 1

Bond whose coupon rate is equal to the YTM, trades at par value.

Bond whose coupon rate is greater than YTM, trades at premium.

Bond whose coupon rate is lower than YTM, trades at discount.

a. Since the bond is selling at a discount, hence coupon rate will be lower than the YTM. So, the yield to maturity must be higher than 4%.

b. Since the bond is selling at a premium, hence coupon rate will be higher than the YTM. So, the yield to maturity must be lower than 7%.

c. Since the bond is selling at face value, hence the yield to maturity is equal to 5%.

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