Question

Your broker offers you the opportunity to purchase a bond with coupon payments of $90 per year and a face value of $1,000. If the yield to maturity on similar bonds is 8%, this bond should: A) Sell for the same price as the similar bond regardless of their respective maturities. B) Sell at a premium. C) Sell at a discount. D) Sell for either a premium or a discount but it's impossible to tell which. E) Sell for par value.

Answer #1

Calculation of coupon rate

= Interest / Par value x 100

= $90 / $1000 x 100

= 9%

Yield to Maturity = 8% ( Given)

The Coupon rate is greater than the YTM, accordingly answer is B) Sell at a premium.

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