The U.S.government will pay Allen $2,500,000 each six months, equal to 2.5% of the $100 million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will repay the $100 million at the end of five years.At the time Allen purchases the bonds, the market prices these bonds to yield Allen 6% annually (3% each six months).The bonds are classified as held to maturity.Because the market requires a _____ than the _____ on the bonds, the bonds will sell on the market for a _____.

Question

Quizplus · Accepted Answer

The market yield is higher than the stated interest rate on the bonds, which means the bonds will sell on the market for a discount. This is because investors demand a higher return to compensate for the lower yield offered by the bonds compared to the market. Choice A and D are incorrect because they suggest a lower market yield, which is not the case according to the question. Choice E is also incorrect because it suggests that the market yield and the stated interest rate are equal, which is not the case.

The USgovernment Will Pay Allen $2,500,000 Each Six Months, Equal to to 2.5