Question

A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today?

A.The coupon rate is greater than the current yield.
B.The yield-to-maturity equals the current yield.
C.The face value of the bond today is greater than it was when the bond was issued.
D.The yield-to-maturity is less than the coupon rate.
E.The bond is worth less today than when it was issued.

Answer 1

Answer:

D.The yield-to-maturity is less than the coupon rate.

Explanation:

Whenever the yield to maturity is less than the bond's coupon rate, bond market value is greater than par value ( premium bond), these applies just as the question states that the premium bond pays $60 in interest annually in seven years and the bond was issued originally 3 years ago at par

in other cases when a bond's coupon rate is less than its yield to maturity, then the bond is selling at a discount and when a bond's coupon rate is equal to its yield to maturity. the bond is selling at par.