Question

A bond will sell at a premium (above par value) ifA) the market value of the bond is greater than the discount rate of the bond.B) investor's current required rate of return is below the coupon rate of the bond.C) current market interest rates are moving in the same direction as bond values.D) the economy is in a recession.

Answer 1

B) investor's current required rate of return is below the coupon rate of the bond.

Step-by-step explanation:

A bond that is sold at a price above its face value is said to be sold at a premium. A bond sells at a premium when its coupon rate is above the market's required rate of return.

When a bond is sold at a premium, it yields an interest rate which is lower than its coupon rate. For example, a bond's face value is $100 and its coupon rate is 8%. If the bond sells at a premium for $110, it will still pay the same coupon, but it will yield a 7.3% interest rate.