Question

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at...

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT? The bond’s coupon rate is equal to 8% The bond’s current yield is less than 8%. The bond’s current yield is equal to 8% The bond’s coupon rate is less than 8% The bond’s coupon rate is more than 8%

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Answer #1

The right answer choice is ” The bond’s coupon rate is more than 8%”

  • If the annual coupon interest rate of a bond is higher than current market interest rate, then the bond will be selling at a PREMIUM.
  • When pricing bonds, there is an inverse relationship between the Market price and market interest rate or Yield to Maturity of the Bond
  • The Market Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value
  • If the Market Interest Rate Increases, then the discounting rate will be higher & the discounting factor will be lower and it will result’s in the Market Price of the Bond to be lower.
  • If the Market Interest Rate Decreases, then the discounting rate will be lower & the discounting factor will be higher and it will result’s in the Market Price of the Bond to be higher.
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