Homework Answers
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
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