Question

Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium bonds? What about discount bonds? For bonds selling at par value?

Answer 1

Bonds may sell at a premium over par value or at a discount based on the prevailing market interest rates and the coupon rate of the bond. Discount bonds are bonds that sell below their face value when the coupon rate is lower than the prevailing market interest rates. Premium bonds are bonds that sell above their face value when the coupon rate is higher than the market interest rates. Bonds selling at par value sell at their face value when the coupon rate is equal to the market interest rates.

Step-by-step explanation:

Bonds may sell at a premium over par value or at a discount based on the prevailing market interest rates and the coupon rate of the bond.

Discount bonds are bonds that sell below their face value. This happens when the coupon rate is lower than the prevailing market interest rates. Investors are willing to buy these bonds at a discount because the total return they receive (including interest and the difference between the purchase price and the face value) is higher than the market interest rates.

Premium bonds are bonds that sell above their face value. This occurs when the coupon rate is higher than the prevailing market interest rates. Investors are willing to pay a premium for these bonds because the coupon payments they receive are higher than the market interest rates, even though they will eventually receive the face value.

Bonds selling at par value are bonds that sell at their face value. This means that the coupon rate is equal to the prevailing market interest rates. Investors are willing to pay the face value because the coupon payments they receive are in line with the market rates.