Question

If a bond always trades at a discount, what can be inferred about its yield?

1) The yield is higher than the coupon rate
2) The yield is lower than the coupon rate
3) The yield is equal to the coupon rate
4) The yield cannot be determined without additional information

Answer 1

If a bond always trades at a discount, it means that the bond is selling for less than its face value. The yield of a bond is the rate of return a bond is expected to pay over time. When a bond trades at a discount, it implies that its yield is higher than the coupon rate.

Step-by-step explanation:

If a bond always trades at a discount, it means that the bond is selling for less than its face value. The yield of a bond is the rate of return a bond is expected to pay over time. When a bond trades at a discount, it implies that its yield is higher than the coupon rate.

For example, let's say a bond has a face value of $1000 and a coupon rate of 5%. If the bond is trading at a discount for $900, the yield on the bond would be higher than 5%.