Final answer:
The most likely yield to maturity on a bond with a coupon rate of 4.5% selling at a premium would be lower than the coupon rate. Option a, 4.30%, is the correct choice since it is less than the coupon rate, reflecting the premium price of the bond. Therefore, the correct option is A.
Step-by-step explanation:
If the coupon rate on a bond is 4.5% and the bond is selling at a premium, the most likely yield to maturity (YTM) on the bond would be lower than the coupon rate. This is because when a bond sells at a premium, it means that its market price is higher than its face value. Investors are willing to pay more for the bond because the coupon rate is higher than the prevailing market interest rates. As a result, the return they would receive from holding the bond to maturity (YTM) would be less than the coupon rate since they paid more for the bond upfront.
In this scenario, the most likely yield to maturity would be 4.30% (Option a) because it is lower than the coupon rate of 4.5%. Option b (4.50%) matches the coupon rate and cannot be correct since the bond is at a premium, and option c (5.20%) is higher than the coupon rate, which would suggest the bond is selling at a discount, not a premium. Option d (unknowable) is not applicable given the information provided. Furthermore, when interest rates fall, bonds previously issued at a higher interest rate are more valuable and can sell for more than face value, solidifying the bond's premium status and the likelihood of a YTM below the coupon rate.