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?

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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

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