Question

Suppose a $1000 bond pays annual “coupon interest” equal to 2% and matures next year. If the yield on bonds with similar risk characteristics is 1%, the price of this bond today is less than $1000.

Answer 1

Correct Answer:

False

When coupon rate is higher than the interest rate, then price of the bond is higher than the face value of the bond.

So, $1000 face value bond with coupon rate to be 2% and it is higher than the yield rate of 1%, will cause bond price to be higher than $1000.

In the given case,

Price, today = 20/(1+1%) + 1000/(1+1%)

Price, today = 1009.9 ( it is higher than $1000)