Lady Products, Inc. just issued 10-year, 8% coupon bonds at par. Outstanding Limbaugh Corp. bonds, which have a maturity of 10 years, sell at a premium to par and are viewed by investors as having the same risk as the Lady bonds. Therefore, it must be true that:

Question

Quizplus · Accepted Answer

Since Limbaugh Corp. bonds sell at a premium and are considered to have the same risk as Lady Products, Inc. bonds, it indicates that the coupon rate on Limbaugh bonds is higher than the 8% coupon rate on Lady bonds. Bonds sell at a premium when the coupon rate is higher than the current market interest rate.