A company releases a five-year bond with a face value of $1 000 and coupons paid semi-annually. 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

When a bond is issued at a premium, it means that it is sold for more than its face value. In order for this to happen, the coupon rate must be higher than the market interest rate.

In this case, the YTM is 6%. If the coupon rate is also 6%, then the bond will be issued at par value ($1 000) because the coupon rate and YTM are the same.

If the coupon rate is lower than 6%, the bond will be issued at a discount because the coupon payments will not be enough to attract investors who could earn a higher rate elsewhere.

Therefore, the coupon rate must be higher than 6% to cause the bond to be issued at a premium. The only choice that fits this criteria is A) 8%.

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