Question

The following information is given about two fixed coupon bonds from Company A and Company B, both of which have several years left until maturity. Both bonds have a par value of $1,000. Based on this information, which of the following is most accurate?

Company A Company B
Coupon = 4% Coupon = 8%
Yield = 6% Yield = 6%
A. Company A’s bond is priced higher than Company B’s and Company B’s bond is traded at a premium
B. Company A’s bond is priced lower than Company B’s and Company B’s bond is traded at a premium
C. Company A’s bond is priced higher than Company B’s and Company B’s bond is traded at a discount
D. Company A’s bond is priced lower than Company B’s and Company B’s bond is traded at a discount

Answer 1

Answer: B. Company A’s bond is priced lower than Company B’s and Company B’s bond is traded at a premium

Step-by-step explanation:

Discount bond ⇒ Bond coupon rate is less than yield which leads to bond having a lower than par price.

Premium bond ⇒ Bond coupon rate is more than yield which leads to bond having higher than par price.

Company A therefore has a discount bond that has a low price compared to Company B which has a premium bond which means that its price is relatively high.

Company B's bond is therefore priced higher than Company A's bond.