- CFA Exams
- CFA Level I Exam
- Study Session 14. Fixed Income (1)
- Reading 44. Introduction to Fixed-Income Valuation
- Subject 1. Bond Prices and the Time Value of Money

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**CFA Practice Question**

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

II. lower; discount

III. higher; discount

IV. lower; premium

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).

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**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. |