Question

If the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be:_______.a. selling at a discount; i.e., the bond's market price should be less than its face (maturity) value.

b. selling at a premium; i.e., the bond's market price should be greater than its face value.
c. selling at par; i.e., the bond's market price should be the same as its face value.
d. purchased because it is a good deal.

Answer 1

b. selling at a premium; i.e., the bond's market price should be greater than its face value.

Step-by-step explanation:

In the case when the market rate of return or yield to maturity is lower than the coupon rate this represents that the bond sells at a premium i.e. the market price of the bond is more than the face value

Let us suppose the market price of the bond is $1,050

And, the face value is $1,000

So the bond is sold at a premium

hence, the correct option is b.