If a bond is selling for a discount that implies and Sele

If a bond is selling for a discount, that implies ____________________ and ____________________ .

Select one:

a. interest rates have risen and the yield to maturity exceeds the coupon rate

b. interest rates have fallen and the yield to maturity exceeds the coupon rate

c. the interest rates have risen and the yield to maturity is less than the coupon rate

d. interest rates have fallen and the yield to maturity is less than the coupon rate

Solution

Correct option is > a. interest rates have risen and the yield to maturity exceeds the coupon rate

If a bond is selling for a discount, that implies interest rates have risen and yield to maturity exceeds the coupon rate

The price of bond is inversely related to interest rate.

When,

Coupon < Yield; then bond sells on discounted price

And

Coupon > Yield; then bond sells on Premium price