Question

Explain why bonds sell for below par when the yield to maturity is higher than the...

Explain why bonds sell for below par when the yield to maturity is higher than the coupon rate and why they sell for above par when the yield to maturity is lower than the coupon rate?

Homework Answers

Answer #1

The yield to maturity is the market interest rate expected by the investor on bonds so when the expected market interest rate is higher for bonds then the coupon payment the investors are not willing to pay more for the bonds of the company and so the bonds are priced lower and the expected return set off by issuing the bonds at discount and then redeem at par.

When the yield to maturity that is expected interest rate is higher than the coupon rate the company is providing a higher return and so there would be number of investors willing to buy the bond which would increase the price of bond beyond the par value. In this case the extra coupon rate is reversed by issuing bond at higher price and then redeem at par.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Explain why bonds sell for below par when the yield to maturity is higher than the...
Explain why bonds sell for below par when the yield to maturity is higher than the coupon rate and why they sell for above par when the yield to maturity is lower than the coupon rate
Why would a bond with a yield higher than the coupon rate sell at a discount?...
Why would a bond with a yield higher than the coupon rate sell at a discount? Why would a bond with a yield lower than the coupon rate sell at a premium?
Bonds will sell at par when their market value is ______________ Higher than their face value...
Bonds will sell at par when their market value is ______________ Higher than their face value Equal to their face value Lower than their face value Independent of their face value Not enough information One advantage of the internal rate of return approach to capital budgeting decision-making is that IRR assumes project cash flows are reinvested at the firm's cost of capital IRR is easy to understand IRR presents a subjective criterion for project selection All of the above are...
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
When the discount rate or yield to maturity is lower than the coupon rate the bond...
When the discount rate or yield to maturity is lower than the coupon rate the bond price is less than its par value. a. True b. False
Company A bonds sell for $887. These bonds have a par value of $1000 and coupon...
Company A bonds sell for $887. These bonds have a par value of $1000 and coupon rate of 9%. If time to maturity is 10 years, what is yield to maturity of these bonds?
Choose the CORRECT statement from the following: Select one: a. If a bond’s yield to maturity...
Choose the CORRECT statement from the following: Select one: a. If a bond’s yield to maturity exceeds its coupon rate, the bond’s current yield must be less than its coupon rate. b. All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds. c. If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the...
Show that if the coupon rate on a bond is larger than the yield-to-maturity, than the...
Show that if the coupon rate on a bond is larger than the yield-to-maturity, than the price must be higher than the par value.
The yield to maturity on one-year zero-coupon bonds is 7.4%. The yield to maturity on two-year...
The yield to maturity on one-year zero-coupon bonds is 7.4%. The yield to maturity on two-year zero-coupon bonds is 8.4%. a. What is the forward rate of interest for the second year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Forward rate of interest             % b. If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? (Do not round intermediate calculations. Round...
Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value. Their nominal yield to...
Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $950. What is the bond's nominal (annual) coupon interest rate?