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Questions and Answers
A bond is issued with a coupon rate of 5%. If market interest rates subsequently fall to 4%, what is the most likely impact on the bond's price?
A bond is issued with a coupon rate of 5%. If market interest rates subsequently fall to 4%, what is the most likely impact on the bond's price?
- The bond's price will remain unchanged.
- The bond will trade at par.
- The bond will trade at a discount.
- The bond will trade at a premium. (correct)
Under what condition will a bond's price be equal to its face value?
Under what condition will a bond's price be equal to its face value?
- When the bond's coupon rate is greater than its yield.
- When the bond's coupon rate is equal to its yield. (correct)
- When the bond's coupon rate is less than its yield.
- Regardless of the relationship between the coupon rate and yield, the price will always equal face value at maturity.
If a bond's yield is significantly higher than its coupon rate, how is this bond typically classified?
If a bond's yield is significantly higher than its coupon rate, how is this bond typically classified?
- A premium bond
- A par bond
- An investment grade bond
- A discount bond (correct)
What market condition is likely to cause a bond to trade at a discount?
What market condition is likely to cause a bond to trade at a discount?
How does a premium bond's coupon rate compare to its yield?
How does a premium bond's coupon rate compare to its yield?
If prevailing interest rates are falling, what kind of bond is most likely to be issued?
If prevailing interest rates are falling, what kind of bond is most likely to be issued?
A bond is issued at $1,000 with a coupon rate of 6%. If similar bonds are now yielding 7%, how would you expect this bond to trade?
A bond is issued at $1,000 with a coupon rate of 6%. If similar bonds are now yielding 7%, how would you expect this bond to trade?
An investor purchases a bond for $900. The bond has a face value of $1,000 and a coupon rate of 5%. What can be inferred about the bond's yield?
An investor purchases a bond for $900. The bond has a face value of $1,000 and a coupon rate of 5%. What can be inferred about the bond's yield?
Considering only the relationship between coupon rate and yield, which of the following bonds would an investor likely pay the most for, assuming all have the same face value and credit rating?
Considering only the relationship between coupon rate and yield, which of the following bonds would an investor likely pay the most for, assuming all have the same face value and credit rating?
How do rising interest rates typically affect outstanding premium bonds?
How do rising interest rates typically affect outstanding premium bonds?
Flashcards
Par Bond
Par Bond
A bond whose price equals its face value because its coupon rate is equal to its yield.
Discount Bond
Discount Bond
A bond whose price is less than its face value because its coupon rate is less than its yield.
Premium Bond
Premium Bond
A bond whose price is higher than its face value because its coupon rate is more than its yield.
Discount Bond & Rising Rates
Discount Bond & Rising Rates
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Premium Bond & Falling Rates
Premium Bond & Falling Rates
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Study Notes
- A bond's price equals its face value when its coupon rate matches its yield.
- A bond trades at a discount when its coupon rate is below its yield.
- Discount bonds are more common when interest rates are increasing.
- A bond trades at a premium when its coupon rate exceeds its yield.
- Premium bonds are more common when interest rates are decreasing.
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