A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 6%, which of the following coupon rates will cause the bond to be issued at a premium?

Question

Quizplus · Accepted Answer

A coupon rate of 8% will cause the bond to be issued at a premium. When market interest rates are lower than the coupon rate, investors are willing to pay more for the bond, driving up its price and resulting in a premium. In this case, a coupon rate of 8% is higher than the YTM of 6%, indicating that the bond offers a higher interest rate than what is available in the market, and thus investors will be willing to pay more for it.

A Company Releases a Five-Year Bond with a Face Value