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A premium bond has a coupon rate greater than the required rate of return and the...

A premium bond has a coupon rate greater than the required rate of return and the fair present value of the bond is lesser than the face or par value.

True

False

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Answer #1

The correct answer is False

The Premium bond is the bond which has price higher than the face value of the bond, The value of bond is computed by discounting all the cash flows (Coupons and Face value) by the required rate of return or Market interest rate. If the Coupon rate is higher than the required rate of return then it means that there will be less discounting of cash flows and value of bond will lead to Higher than face value.

Therefore, the first statement A premium bond has a coupon rate greater than the required rate of return is true and the later statement which is the fair present value of the bond is lesser than the face or par value is false.

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