Question

a 20 year, 8% coupon rate, $1,000 par bond that pays interest semi-annually bought five years ago for $850. this bond is currently sold for 950. what is the yield on this bond?

a.12.23%

b.11.75%

c.12.13%

d.11.23%

an increase in interest rates will lead to an increase in the value of outstanding bonds.

a. true

b. false

a bond will sell ____ when coupon rate is less than yield to maturity, ______ when coupon rate exceeds yield to maturity, and ______ when coupon rate is equal to yield to maturity.

a. at a discount, at a premium, at par

b. at a premium, at a discount, at par

c. at par, at a discount, at a premium

d. at par, at a premium, at a discount

Answer 1

1. b. 11.75%

2. The change in interest rates is inversely proportional to the change in the value of the bonds. If the interest rates increase, then the value of the bonds is decreased (because bonds always pay fixed amount of interest) and vice versa. Hence, the given statement is B. FALSE.

3. When coupon rate is more than the yield to maturity, then demand for the bond raises and hence, it is sold at premium and vice versa. So, a bond will sell at discount when coupon rate is less than yield to maturity, at premium when coupon rate exceeds yield to maturity, and at par when coupon rate is equal to yield to maturity.

Hence, the answer is a.