Question

If an investor pays more for a bond than the bond’s face (maturity) value, the yield that the investor will earn, if they hold that bond until maturity, will be a higher value than the bond’s coupon.

a) True

b) False

* Explain why?

Answer #1

a] False.

Explanation:

Once a bond is issued, the expected cash flows to the holder does not change. That is the regular coupon payments and the maturity value remain the same, whatever the market rate of interest. Hence, when more than the face value is paid to acquire a bond, it will mean that the yield will be lower than the coupon rate.

For example:

Consider a bond that is issued at a face value of $1000, with annual coupon of 10% [this amounts to annual interest payments of $100] and having maturity of 10 years.

Further, let it be that the bond is quoted immediately theerefter at a price of $1,100. Still the expected coupons or the face value do not change though the price is up. This will naturaly mean lower yield.

.

bond has $1,000 face value, 25 years to maturity, 3.6% annual
coupon rate. The bond’s current price is $948.92. Assuming the bond
pays coupons semiannually, what is the bond’s yield to maturity
(YTM)?

A bond with a $1,600 face value and 13 years remaining until
maturity pays a coupon rate of 8.25% compounded semi-annually.
Calculate the yield to maturity if the bond is priced at
$1,280.

True or False and Explain
The yield to maturity of a coupon bond that is selling for less
than its face value is less than the coupon rate.

The face value of the bond is paid at the maturity of the
bond.
True
False
Which of the following is used as a discount rate while
calculating the bond price?
Yield to Maturity (YTM)
Coupon Rate
Face Value
None
Coupon payments are determined by multiplying face value of the
bond with the coupon rate.
True
False
Which of the following explains the differences in interest
rates?
The length of the investment (maturity premium).
The level of risk of the...

A 15-year bond with a face value of $1,000 currently sells for
$850. Which of the following statements is CORRECT?
The bond’s coupon rate exceeds its current yield.
The bond’s current yield exceeds its yield to maturity.
The bond’s yield to maturity is greater than its coupon
rate.
The bond’s current yield is equal to its coupon rate.
If the yield to maturity stays constant until the bond matures,
the bond’s price will remain at $850.

1. The face value of the bond is paid at the maturity of the
bond. True or false?
2. Which of the following is used as a discount rate while
calculating the bond price?
Yield to Maturity (YTM)
Coupon Rate
Face Value
None
3. Coupon payments are determined by multiplying face value of
the bond with the coupon rate. True or false?
4. Which of the following explains the differences in interest
rates?
The length of the investment (maturity premium)....

An investor purchases a 30-year municipal bond for $960. The
bond’s coupon rate is 8 percent and, it still had 16 years
remaining until maturity. If the investor holds the bond until it
matures and collects the $1000 par value from the municipality and
his marginal tax rate is 34 percent, what will be his (effective)
yield to maturity?

A bond with 10 years to maturity has a face value of $1,000. The
bond pays an 8 percent semiannual coupon, and the bond has a 5.9
percent nominal yield to maturity. What is the price of the bond
today?

a bond has a face value of $1000 and 14 years until maturity.
the bond has a 3% APR coupon with semi- annual coupon payments.
currently, investors seek a 6% APR yield to maturity to hold the
bond. what is the current trading price of the bond?

A bond that pays coupons annually is issued with a coupon rate
of 4 percent, maturity of 30 years, and a yield to maturity of 7
percent. What annual rate of return will be earned in the following
situations by an investor who purchases the bond and holds it for 4
year if the bond’s yield to maturity when the investor sells is 8
percent? a) All coupons were immediately consumed when received. b)
All coupons were reinvested in your...

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