Question

When a bond's yield to maturity is higher than the bond's coupon rate, the bond: A....

When a bond's yield to maturity is higher than the bond's coupon rate, the bond:

  • A. has a high risk of default

  • B. has reached its maturity date

  • C. is selling at a discount

  • D. is priced at par

  • E. is selling at a premium

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Answer #1

When a bond's yield to maturity is higher than the bond's coupon rate, the bond is selling at a discount.

Option C is correct

Yield to maturity > Coupon rate: Discount bond

Yield to maturity = Coupon rate: Par bond (So, option D is incorrect)

Yield to maturity < Coupon rate: Premium bond (So, option E is incorrect)

Option A is incorrect because relationship between yield to maturity and coupon rate doesn't tell anything about default risk

Option B is incorrect because when the maturity date is reached the bond sells at par

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