A bond has a coupon rate of 6%. If the bond is issued when the yield...

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A bond has a coupon rate of 6%. If the bond is issued when the yield is 8%, this bond will sell for a Premuim for a Discount

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Answer 1

Answer #1

The correct answer is option B i.e. for a discount

If the bond rate is 6% and bond is isssued when the yield is 8% the bond will be issued at discount

Let us understand this by taking an example

If the bond with the maturity of 5 years and face value of $ 100 with a coupon rate of 6% is issued and the the yield is 8%. Find the issue price of the bond

Year	Coupon @ 6%	PV @ 8%	*Coupon PV**
1	6	0.93	5.56
2	6	0.86	5.14
3	6	0.79	4.76
4	6	0.74	4.41
5	106	0.68	72.14
Total	92.01

In the above example we can see that the bond will be issued in discount

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