A bond with a R100 annual interest payment and R1,000 face value with five years to maturity (not expected to default) would sell for a premium if interest rates were below 9% and would sell for a discount if interest rates were greater than 11%.

Question

Quizplus · Accepted Answer

When interest rates are below the bond's coupon rate (9% in this case), investors are willing to pay more than the face value for the bond because it provides a higher yield than what is available in the market. This results in the bond being sold at a premium. Conversely, when interest rates are above the bond's coupon rate (11% in this case), investors can find higher yields elsewhere and are not willing to pay the full face value for the bond. This results in the bond being sold at a discount.

A Bond with a R100 Annual Interest Payment and R1,000