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If a medium maturity coupon bond is issued at a​ premium, then, over its first​ year,...

If a medium maturity coupon bond is issued at a​ premium, then, over its first​ year, its price will​ ________. Assume that interest rates and the​ company's default risk premium​ don't change.

A.

fall

B.

rise

C.

remain unchanged

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Answer #1

FALL

A bond issued at a premium will have price higher than its face value. As the bond approaches its maturity, the price will move towards its face value and at maturity price will be equal to face value. Therefore, a bond with price higher than face value will FALL over its first year since the price will move towards its face value.

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