If a bond is currently trading for a price higher than par, then which of the...

If a bond is currently trading for a price higher than par, then which of the following must be true?

Answer: The coupon rate is greater than its yield-to-maturity

I have the answer, by why is this?

Solutions

Expert Solution

The price of a bond is the discounted value of the expected cash flows from the bond if it is held to maturity.

The discount rate is the market interest rate (YTM) for similar securities.

The YTM can be:

*Equal to the coupon rate, or

*Greater than the coupon rate, or

*Less than the coupon rate.

The price of the bond will depend on the YTM and its comparison, as above, with the coupon rate.

If the YTM is equal to the coupon rate, then the price of the bond will equal its face value.

If the YTM is more, then the price of the bond will be less than the face value, as the coupons (in dollar) and the maturity value get discounted at a rate higher than the coupon rate.

If the YTM is less, then the price of the bond will be more than the face value, as the coupons (in dollar) and the maturity value get discounted at a rate lower than the coupon rate.

In short YTM and prices move inversely.

Hence, the answer:

jeff jeffy answered 11 months ago

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