Question

When using trial and error to compute the yield to maturity (YTM) for a 6 percent coupon bond that trades at a premium, the process can be shortened if the initial guess is _______ 6 percent.

Answer 1

less than 6%

Step-by-step explanation:

when a bond trades at a premium, it means the bond's coupon rate was higher than the market rate, so investors are willing to pay more to purchase the bond, e.g. bond's face value is $1,000, if it is sold at a premium its market price will be higher than $1,000.

To determine the price of a bond sold at a premium or at a discount, you must determine the present value of the coupons paid plus the face value at maturity date. But if you are going to do this manually, for a bond that sells at a premium and its coupon rate is 6%, the actual bond yield will be lower than 6%.

Answer 2

The correct answer is Lower than.

Step-by-step explanation:

The yield at maturity (YTM) of a bond is the total return (which includes interest and capital gain) that it obtains upon expiration. It is expressed as a percentage and tells investors what the return will be if they acquire the bond and keep it until the issuer reimburses it. It is difficult to calculate the yield to maturity with precision, but you can approach its value if you use a profitability table or one of the many calculators that are available on the Internet for this purpose.