Question

If bond coupon payment is is lower than r, its called

a. par bond

b. premium bond

c. discount bond

Answer 1

The right answer choice is “Option-C, Discount Bond”

-If bond coupon payment is is lower than r, its called a discount bond.

-The Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value

-If the coupon rate of a bond is lower than the market interest rate (r) of the Bond, then the bond will be selling at discount.

-When pricing bonds, there is an inverse relationship between the Market price and market interest rate or Yield to Maturity of the Bond

-If the Market Interest Rate Increases, then the discounting rate will be higher & the discounting factor will be lower and it will result’s in the Market Price of the Bond to be lower.

-If the Market Interest Rate Decreases, then the discounting rate will be lower & the discounting factor will be higher and it will result’s in the Market Price of the Bond to be higher.

- If the Yield to Maturity [YTM] is greater than the coupon rate, then the selling price of the bond will be less than its par value, since the bonds are selling at discount

- If the Yield to Maturity [YTM] is less than the coupon rate, then the selling price of the bond will be more than its par value, since the bonds are selling at premium.