Final answer:
Given a coupon rate of 10% and a yield-to-maturity of 8%, a bond should trade at a premium, that is above its face value. None of the given options - $888, $1,000, $1,111, $1,200 - are feasible, as each one does not reflect the bond's expected premium price given its higher coupon rate relative to the YTM.
Step-by-step explanation:
You are considering the purchase of a long-term bond with a face value of $1,000 that pays a coupon rate of 10%. The current yield-to-maturity (YTM) of a bond is 8%. We need to determine which of the given bond prices is feasible.
If a bond's YTM is lower than its coupon rate, it means the bond is likely to be sold at a premium, which is more than its face value. This is because the bond's coupon payments are more attractive compared to the current market rate (YTM), hence investors are willing to pay more for it. Therefore, Option 4: $1,200, which is above the face value, is not feasible since it is well above the current YTM of 8%. Option 3: $1,111 is also not feasible for the same reason.
Option 1: $888 and Option 2: $1,000 are both below the face value of the bond, which is inconsistent with the bond selling at a premium. However, since the bond pays a 10% coupon and the going YTM is 8%, investors would prefer this bond and thus it should trade at a premium. Therefore, none of the offered options are feasible.