Question

Bonds issued by BB&C communications that have a coupon rate of interest equal to 10.65 percent currently have a yield to maturity (YTM) equal to 10.75 percent. Based on this information, what if anything, can be said about the price of these bonds in the financial markets?

a- They are selling at a premium

b- They re selling at par value

c- They are selling at a discount

d- Not enough information is given to answer this question

Answer 1

Correct answer is C

--------------------------------------------------------------------------------------------------------------------------

Investors uses YTM to discount the cash inflows from the bond and calculate price of the bond.

So if the bonds YTM is more than its coupon rate, bond will be trading at discount, and if the coupon rate is more than YTM then it will be trading at premium.

If both are equal then bond will trade at par.

So in this case YTM is 10.75%, while bonds coupon rate is 10.65%, since YTM is greater than its coupon rate, so bond will be trading at discount.

--------------------------------------------------------------------------------------------------------------------------

Feel free to comment if you need further assistance J

Pls rate this answer if you found it useful.