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 bond issued at a premium means that its price is higher than its face value. When market interest rates are lower than the coupon rate, the bond is likely to be issued at a premium. In this case, the YTM is 6%. If a higher coupon rate is offered, the bond is likely to be more attractive to investors and may be issued at a premium. Choice D has a coupon rate of 8%, which is higher than the YTM, and is therefore the best choice.

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