The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually.Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade:a.at a premium.b.None of them.c.on sold.d.at par.e.at a discount.
Question
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually.Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade:a.at a premium.b.None of them.c.on sold.d.at par.e.at a discount.
Solution
The correct answer is a. at a premium.
When the yield to maturity (YTM) is less than the coupon rate, the bond will trade at a premium. This is because the bond's coupon payments are more attractive compared to other investments with the same risk level, causing more investors to want the bond and pushing up its price. In this case, the coupon rate is 8% and the YTM is 7.5%, so the bond will trade at a premium.
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