A bond has YTM=5% and coupon rate is 3%. This is a A. discount bond B....

A bond has YTM=5% and coupon rate is 3%. This is a A. discount bond B. par bond C. premium bond

Solutions

Expert Solution

Yield to Maturity = 5%

Coupon rate = 3%

Coupon rate < YTM, it means the bond is providing a lower return than what the market is providing, So, the investor does not show interest on the bond because he gets lower return and he invests in the market. To offset the arbitrage profit/loss the price of the bond will be lowered to extent where effective return on the investment equals the YTM.

If coupon rate > YTM, investor shows interest to purchase the bond which creates a demand on the bond. Increase in demand increases the price of the bond.

Since the YTM (5%) is higher than the coupon rate (3%), The bond will sell at discount.

Answer is Bond is Discount bond.

Option 'A' is correct

jeff jeffy answered 2 years ago

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