Question

17.

Assume a semi-annual coupon bond matures in 3 years, has a face value of $1,000, a current market price of $989, and a 5 percent coupon. Which one of the following statements is correct concerning this bond?

A.

The current coupon rate is greater than 5 percent.

B.

The bond is a money market instrument.

C.

The bond will pay less annual interest now than when it was originally issued.

D.

The current yield exceeds the coupon rate.

E.

The bond will pay semi-annual payments of $50 each.

Answer 1

Option D is correct. The current yield exceeds the coupon rate.

The bond is selling at a discount because its price is lower than the face value.

If the bond is selling at a discount, then the yield exceeds the coupon rate.

Also note that if the bond is selling at a premium, then the yield is lower than the coupon rate.

Option A is incorrect becuase the coupon rate is equal to 5%

Option B is incorrect becuase the money market instruments will have a maturity of less than one year

Option C is incorrect becuase the interest payment is the same

Option E is incorrect becuase the semi-annual payment = 1,000 * 0.05/2 = $25