Question

If the coupon rate is equal to the yield to maturity on a bond, then the price of the bond is always equal to the par value.

Is this statement true or false? Explain and support your answer with an example.

Answer 1

True

Explanation

When yield is equal to coupon rate value of bond is equal to face value because value of bond is present value of cashflows so when market rate is different present value will be not equal to face value so when we discount cashflows with same as coupon rate then value of bond is equal to facevalue

Example consider a 1 year bond which pays coupon of 10%

So net receipts next year is 110

If discount rate is 9% value of bond is

= 110/1.09 = 101

When discount rate is 10%

Value of bond is 110/1.1 = 100 so equal to face value