The answer to the question is highlighted in red. Explanations are highlighted in green.
6. If market interest rates for corporate bonds of similar risk drop from 7 percent to 6 percent, which of the following bonds would sell for a premium?
a. 5 percent coupon bond with 10 years remaining until maturity
b. 6 percent coupon bond with one year remaining until maturity
c. 5 percent coupon bond with one year remaining until maturity
d. 7 percent coupon bond that matures today.
e. 7 percent coupon
bond with 10 years remaining until maturity
A
bond sells for a premium when its coupon rate of interest is greater than its
yield to maturity (YTM). As a result, the bond with a coupon rate of interest
that is greater than 6 percent should sell for a premium. The 7 percent coupon
bond that matures in 10 years should sell for a premium. The 7 percent coupon
bond that matures today should be selling for its face value, which means it
should be selling for par, because investors will receive the face value of the
bond today—that is, the present value of an amount to be received today is the
same as the amount to be received.