Why would a bond with a yield higher than the coupon rate sellat a discount?...

Why would a bond with a yield higher than the coupon rate sell at a discount? Why would a bond with a yield lower than the coupon rate sell at a premium?

Expert Solution

Think of yield as the rate that other bonds are offering in the market now, so that is the market rate. The coupon rate that is offered by a bond is actually the interest rate of the bond. So if the Coupon rate is more than the yield in the market, then it means that this particular bond is paying more than the rest of the bond in the market right now. So investors will obviously want to pay more than the price of the bond as they will receive periodic interest(coupon) that is more than what other bonds are offering. So bonds trade at a premium.

Similarly, if the coupon rate of a bond is less than that of yield in the market, then it means that the particular bond will be offering less than what other bonds are offering in the market. So investors will want to spend less on this bond as they will receive a lower periodic interest as compared to other bonds in the market. Bonds trade at a discount

jeff jeffy answered 2 years ago

Explain why yield to maturity is higher than current yield when you buy a coupon-bearing bond...

Explain why yield to maturity is higher than current yield when you buy a coupon-bearing bond for less than its $1000 face value? If interest rates suddenly fall, would you rather be holding a portfolio composing of short-term securities or long-term securities? A zero-coupon bond with face value of $10,000 that matures in two years goes on sale today for $9,100. What is the bond’s yield to maturity? Using the bond described in the previous question, imagine that you purchase...

If the yield of maturity of the bond is lower than the coupon rate, the price...

If the yield of maturity of the bond is lower than the coupon rate, the price of this bond will be? Select one: a. Higher than the par value. b. Lower than the par value. c. Equal the par value. The situation in which the current market price is greater than intrinsic value is called: Select one: a. All answers are incorrect. b. Equilibrium. c. Stock undervalued. d. Stock overvalued. An investor is considering purchasing a 10-year zero-coupon bond of...

1. A. Why is the bond equivalent yield of a T?bill higher than the yield calculated...

1. A. Why is the bond equivalent yield of a T?bill higher than the yield calculated on a discount basis? (Some of the bond equivalent yields are the same as the discount yield in Exhibit 7.4 because the Wall Street Journal rounds the numbers presented and they aren’t really the same.) B. Why do issues of securities by U.S. government agencies tend to have higher interest rates than similar issues of debt by the U.S. Treasury? C.What did the Federal...

Explain why a bond issued with a coupon rate of 6% is trading at a discount?...

Explain why a bond issued with a coupon rate of 6% is trading at a discount? par? premium? if the current market rate is 9%.? Choose one of the three - par, discount, premium

Which bond is will trade at discount? A. Stated coupon rate for this bond is 8...

Which bond is will trade at discount? A. Stated coupon rate for this bond is 8 % and appropriate YTM is 7% B. Stated coupon rate for this bond is 8 % and appropriate YTM is 8% C. Stated coupon rate for this bond is 8 % and appropriate YTM is 9% D. Stated coupon rate for this bond is 8 % and appropriate YTM is 6% Please explain.

What is the coupon rate of an annual coupon bond that has a yield to maturity...

What is the coupon rate of an annual coupon bond that has a yield to maturity of 5.5%, a current price of $949.81, a par value of $1,000 and matures in 15 years? 6.33% 4.70% 3.07% 5.00%

If the yield to maturity and the coupon rate are the same, then the bond should...

If the yield to maturity and the coupon rate are the same, then the bond should sell for ______. a. a premium b. a discount c. par value

what is the yield to call of a bond that has a coupon rate of a...

what is the yield to call of a bond that has a coupon rate of a 10.25% payable semiannually, a yield to maturity of 9.75%. The bond has 12 years to maturity, 3 years to call and the call premium is two year's interest?

If the net convenience yield is lower than 100% but higher than the risk free rate...

If the net convenience yield is lower than 100% but higher than the risk free rate Group of answer choices The future rate for a commodity should be higher than the spot price of the commodity. The future rate should be negative The future rate of the commodity will converge to zero as the maturity of the contract goes to infinity. None of the above.

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

Question