Homework Answers
Answer:
Opion (D) 6% is correct
A bond’s coupon rate is the amount of interest income it earns each year based on its face value. A bond’s yield to maturity is its total estimated return if the bond is held until maturity.
When coupon rate of a bond is equal to the YTM at issue, bond is issued at par value.
When coupon rate of a bond is lower than the YTM at issue, bond is issued at a discount (relative to par value).
When coupon rate of a bond is higher than the YTM at issue, bond is issued at a premium (relative to par value).
In this question, only 6% is higher than YTM of 4%, hence that is our answer. At a coupon rate of 4%, bond would have been issued at par. At a coupon rate of 1% and 2%, bond would have been issued at discount (since YTM > coupon rate in these cases).
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