Which one of the following statements is correct concerning premium bonds?

Question

Quizplus · Accepted Answer

Premium bonds are bonds that are trading above their par value, which implies that the coupon rate is higher than the prevailing market interest rate. As a result, the yield to maturity will be less than the coupon rate because the investor pays more for the bond than its par value. Hence, statement D is correct.

A) The premium increases when interest rates increase - This statement is incorrect because when interest rates increase, the bond's price decreases, and the premium reduces.

B) The coupon rate is less than the current yield - This statement is incorrect because the coupon rate is higher than the current yield for premium bonds.

C) As the time to maturity decreases, the premium increases - This statement is incorrect because as the time to maturity decreases, the premium reduces.

E) The par value exceeds the face value - This statement is incorrect because the par value is the face value of the bond, and for premium bonds, the market value exceeds the face value.

Which One of the Following Statements Is Correct Concerning Premium