Question

A company releases a? five-year bond with a face value of? $1000 and coupons paid semiannually. If market interest rates imply a YTM of 8%, which of the following coupon rates will cause the bond to be issued at a? premium?

A. 6%

B.10%

C. 8%

D. 5%

Answer 1

Answer is B.10%

A bond’s coupon rate is the amount of interest income it earns each year based on its face value. A bond’s yield to maturity is its total estimated return if the bond is held until maturity.

When coupon rate of a bond is equal to the YTM at issue, bond is issued at par value.

When coupon rate of a bond is lower than the YTM at issue, bond is issued at a discount (relative to par value).

When coupon rate of a bond is higher than the YTM at issue, bond is issued at a premium (relative to par value).

In this question, only 10% is higher than YTM of 8%, hence that is our answer. At a coupon rate of 8%, bond would have been issued at par. At a coupon rate of 5% and 6%, bond would have been issued at discount (since YTM > coupon rate in these cases).