Multiple Choice
A bond’s ______ is generally $1,000 and represents the amount borrowed from the bond’s first purchaser.
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11. Long Term Liabilities
Introduction to Bonds and Bond Characteristics
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All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.
A
a premium; greater than
B
a discount; greater than
C
par; less than
D
a premium; equal to
Verified step by step guidance1
Understand the relationship between a bond's yield to maturity (YTM) and its coupon rate. The YTM is the return an investor expects to earn if the bond is held until maturity, while the coupon rate is the fixed annual interest payment as a percentage of the bond's face value.
Recognize the key principle: When the YTM is greater than the coupon rate, the bond will sell at a discount because investors demand a higher return than the bond's fixed coupon payments provide.
Similarly, when the YTM is less than the coupon rate, the bond will sell at a premium because the bond's fixed coupon payments are more attractive than the current market rate.
If the YTM equals the coupon rate, the bond will sell at par value because the bond's fixed payments align with the market's required return.
Match the given options to the correct principle: A bond sells at a discount when the YTM is greater than the coupon rate, at a premium when the YTM is less than the coupon rate, and at par when the YTM equals the coupon rate.
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