Question

question 1

Benjamin Corp. bonds pays an annual coupon rate of 10% on a face value of $1,000. If investors' requiredrate of return is now 8% on these bonds, they will be priced at:

	I.	par value, which means market price equals face value
	II.	a premium over par value, which means market price will be higher than face value
	III.	a discount to par value, which means market price will be less than face value
	IV.	can be at a premium or disount from face value
	V.	None of the options specified here

question 2

A bond will sell at a discount (below par value) if:

	I.	if the required rate of return is less than the coupon rate of the bond
	II.	if the coupon rate of the bond is more than the required rate of return of the bond
	III.	required rate of return equals coupon rate of the bond
	IV.	required rate of return is higher than the coupon rate of the bond
	V.	None of the options specified here

question 3

If market interest rates ______, bond prices _________.

I. increase; increase

II. increase; decline

III. decline; decline

IV. decline; increase

	I.	I and II only
	II.	I and III only
	III.	II and III only
	IV.	II and IV only
	V.	None of the options specified here

Answer 1

If a question gives you the required rate of return, take in place of YTM

Question 1:

Since the required rate of return (8%) < coupon rate (10%) in this question, the bond would trade at a price higher than the par value. Hence, Option II is correct.

Question 2:

The answer is Option IV. When required return on bond > coupon rate, the bond would trade at a price less than the par value.

Question 3:

The answer is Option

IV.	II and IV only

This is based on the bond price relationship with the required rate of return or YTM, which is inverse in nature.