Question

Based on what you learned about how the relationship between coupon rate and yield to maturity determine the relationship between price and par, rank the following bonds from lowest to highest value:

a. An 8% coupon bond with a yield of 9%
b. A bond with a coupon rate of 3% when yields are 2%
c. A bond that pays a coupon of $60 and has a yield to maturity at 6%

Answer 1

Ranked in order

1 - b

2 - c

3 - a

Step-by-step explanation

When the coupon rate is greater than the YTM, the bond's current price is greater than it's face value and the bond trade at a premium. Bond B is trading at a premium.

When the coupon rate is less than the YTM, the bond's current price is less than it's face value and the bond trade at a discount. Bond A is trading at a discount.

When the coupon rate is equal to the YTM, the bond's current price is equal to it's face value. Bond C has a current price equal to its face value.