Question

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is CORRECT?

a) The bond sells at a price below par.

b) The bond has a current yield greater than 8%.

c) The bond sells at a discount.

d) The bond’s required rate of return is less than 7.5%.

e) If the yield to maturity remains constant, the price of the bond will decline over time.

Answer 1

Answer:

a) The bond sells at a price below par.

Explanation:

It means that the investor needs to pay a price lower than the par value the get a treasury bond, the coupons are fixed and the return of the principal it's the same as issued, if the yield to maturity (7,5%, discount rate in the present value formula) it's less than the rate of coupons (8%), then the price must be lower than the par value to meet the result.

When the bonds are traded at par value it means that the coupon rate it's the same of the yield to maturity.

And fi the bonds are traded at a price above par then the price of the bond are higher than the issued price.