Question

Years ago, a bond was issued at par with a 7% coupon. This year, new issue bonds of similar credit quality are being issued at 10%. Which statement is TRUE

Answer 1

Answer: A. The new bonds will be issued at a premium to the current price of the 7% bonds

Step-by-step explanation:

The New Bonds will have a coupon of 10% which will be higher than the 7% that was previous on offer for the same type of bonds.

This means that the same type of bond is giving a greater return than before. Investors will therefore want more of the bond giving out better returns and will not mind paying a higher price to get it.

For this reason, the bonds issued this year with a 10% coupon will sell at a Premium (higher than) the bonds that were issued years ago that only have a coupon rate of 7%.