CFA Practice Question

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CFA Practice Question

Bonds that have coupon rates ______ than market rates will sell at a ______.

I. higher; premium
II. lower; discount
III. higher; discount
IV. lower; premium
Correct Answer: I and II

When bond coupon rates are higher than the market rate (yield to maturity) it that means that interest rates have declined since the original offering and the price sells at a premium (and vice versa).

User Contributed Comments 8

User Comment
gsuwp I think it is III and IV
weez Its 1 and 2. Basically the bond will trade at a premium when coupon rates are higher than mkt rates because the investor owns something worth more than the general market has. So if he were to sell it, he would command more $$
AyshaAli when the coupon rate is higher than the market rate then it the investor will be getting more income, hence the bond price will be higher and vice versa.
gazza77 gsuwp you can sell me your higher paying bonds for less than par and i'll sell you my low yeilding bonds for a premium. Sounds fair to me
reganbaha That's OK, you thought wrong.
khalifa92 @gsuwp

when the rate used in the calculation is the market interest rate(r):
1- if r > coupon rate = premium
2- if r = coupon rate = trades at par
3- if r < coupon rate = discount

when the rate used in the calculation is yield to maturity (I/Y):
1- if I/Y > coupon rate = discount
2- if I/Y = coupon rate = trades at par
3- if I/Y < coupon rate = premium

why ? because both have different definitions. In the BAII calculator in the time value of money line it says I/Y because its the implied rate.
khalifa92 r = required rate of return in market for investors to take on risk.
I/Y= internal rate of return to discount future cashflows to equap present value.
khalifa92 my comments are wrong.
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