Question

All else constant, a bond will sell at _____ when the bond yield is _____ the coupon rate.

A. at par; less than

B. a premium; equal to

C. a discount; lower than

D. a premium; lower than

E. at par; higher than

Answer 1

The correct answer is Option D

The Bond will sell at the premium when the bond yield is lower than coupon rate because the value of the bond is the present value of all the cash flows that is going to generate over the years and to arrive at present value the discount rate used is the market interest rate which is the yield to the investors. If the yield is lower than coupon rate then it will lead to lesser discounting leading to the present value of cash flows more than the par value or face value which refers to premium bond.