Question

A bond has a face value of $1,000. The bond matures in 20 years. The coupon rate on the bond is 8.00%. The Yield is 7.00%. Which of the following is true about the current price of the bond?

a) The price will be lower than face value
b) There is no way to calculate the price of the bond
c) The price will be the same as face value
d) The price will be higher than face value

Answer 1

Since the bond's coupon rate is higher than the current market yield, its current price will be higher than its face value due to its attractiveness relative to newly issued bonds at the current yield.

Step-by-step explanation:

The current price of the bond will be determined based on its coupon rate relative to the current yield to maturity. In this case, the bond coupon rate is 8.00%, but the yield to maturity is only 7.00%. This indicates that the bond is offering a higher interest payment compared to the current market rate. Hence, the bond will be more attractive to investors than new bonds issued at the current lower yield. As a result, investors would be willing to pay more for this bond, driving its price above face value. Therefore, the correct answer to the question, 'The current price of the bond is: d) The price will be higher than face value.'