Question

An 8 percent corporate bond that pays interest semi-annually was issued last year. Which two of the following most likely apply to this bond today if the current yield-to-maturity is 7 percent?

1) I. a structure as an interest-only loan
2) II. a current yield that equals the coupon rate
3) III. a yield-to-maturity equal to the coupon rate
4) IV. a market price that differs from the face value

Answer 1

The two answers that most likely apply to this bond today if the current yield-to-maturity is 7 percent are: 1) a structure as an interest-only loan 2) a market price that differs from the face value.

Step-by-step explanation:

The two answers that most likely apply to this bond today if the current yield-to-maturity is 7 percent are:

1. I. a structure as an interest-only loan: When interest rates fall, the market value of a bond with a fixed interest rate will increase as the coupon payments become more attractive compared to the current market rates.
2. IV. a market price that differs from the face value: The market price of a bond is influenced by interest rates. When the yield-to-maturity is below the coupon rate, the bond will sell at a premium, above its face value. When the yield-to-maturity is above the coupon rate, the bond will sell at a discount, below its face value.