Question

The Sisyphean Company has a bond outstanding with a face value of $5,000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8.6% and that the coupon payments are to be made semiannually Assuming the appropriate YTM on the Sisyphean bond is 7.1%, then this bond will trade at O A. a discount. О В. раг. O C. a premium. O D. none of the above

Answer 1

Solution :

The relationship between Yield to maturity and coupon rate can be explained as follows :

a.When the Yield to maturity of a bond is greater than its coupon rate, the bond is said to be trading at a discount.

b.When the Yield to maturity of a bond is lesser than its coupon rate, the bond is said to be trading at a premium

c. When the Yield to maturity of a bond is equal to its coupon rate, the bond is said to be trading at par.

As per the information given in the question we have

Yield to maturity of the bond = 7.1 %

Coupon rate of the bond = 8.6 %

Since the Yield to maturity of the bond at 7.1 % is lesser than the Coupon rate of the bond at 8.6 %, the bond is said to be trading at a premium.

Thus the solution is Option C. a premium