Question

when the coupon the All else constant, a bond will sell at yield to maturity a premium; less than a premium; equal to a discount; less than D. a discount; higher than par; less than с. 4 The Walthers Company has a semi-annual coupon bond outstanding tanding. An increase in the market rate of interest will have which of the following effects which of the following effects on the bond? increase the coupon rate decrease the coupon rate increase the market price decrease the market price increase the time period Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par. Which of the following statements is correct? The bonds will become discount bonds if the market rate of interest declines. The bonds will pay 10 interest payments of $60 each. The bonds will sell at a premium if the market rate is 5.5 percent. The bonds will initially sell for $1,030 each. The final payment will be in the amount of $1,060. Oil Well Supply Co. offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.25%. The bonds mature in 6-years. What is the market price of the bond? $989.70 $991.47 $996.48 $1,002.60 $1,011.99 5 Grand Adventure Properties offers a 9.5 percent coupon bond with annual payments. The YTM is 11.2% and the maturity date is 11-years from now. What is the market price of the bond? U. $895.43 $896.67 $941.20 $946.18 $953.30

Answer 1

Note: As per answering guidelines, only the first question can be answered.

Solution- 1

When a bond has an yield to maturity (YTM) equal to its coupon rate, it sells at par or face value. This ensures that return on the bond is equal to its YTM.

When a bond has YTM higher than its coupon rate, it sells at a discount to its face value. If the bond were to sell at face value in such a case, the returns for investors would be equal to coupon rate which is lower than the yield to maturity or required rate of return. Therefore, the market pushes the price of the bond downwards from its face value and sells at a discount to ensure that the return on the bond is equal to its YTM.

When a bond has YTM lower than its coupon rate, it sells at a premium to its face value. If the bond were to sell at face value in such a case, the returns for investors would be equal to coupon rate which is higher than the yield to maturity or required rate of return. Therefore, the market pushes the price of the bond upwards from its face value and sells at a premium to ensure that the return on the bond is equal to its YTM.

Analysis of options:

A. All else constant, a bond will sell at a premium when the coupon rate is less than the yield to maturity.

Since a bond sells at discount when coupon is less than YTM, this option is not correct.

B. All else constant, a bond will sell at a premium when the coupon rate is equal to the yield to maturity.

Since a bond sells at par when coupon is equal to YTM, this option is not correct

C. All else constant, a bond will sell at a discount when the coupon rate is less than the yield to maturity.

Since, bond sells at discount when coupon is less than YTM, this option is correct

D. All else constant, a bond will sell at a discount when the coupon rate is higher than the yield to maturity.

Since, bond sells at premium when coupon is higher than YTM, this option is not correct

E. All else constant, a bond will sell at par when the coupon rate is less than the yield to maturity.

Since, bond sells at discount when coupon is less than YTM, this option is not correct

Conclusion:

The correct option is option C