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    Question

    If a bond's coupon rate is above the yield required by

    the market, the bond value will be-
    A At premium Correct Answer Incorrect Answer
    B At par Correct Answer Incorrect Answer
    C At discount Correct Answer Incorrect Answer
    D Depending on the tenure of the bond Correct Answer Incorrect Answer
    E May be at premium or discount Correct Answer Incorrect Answer

    Solution

    If a bond's coupon rate is above the yield required by the market, the bond will trade at a premium, because investors will be willing to pay a higher price to achieve the additional yield. As long investors continue to buy the bond, there will be more demand than supply of the bond, thus the yield will decrease until it reaches market equilibrium. Similarly, when a bond's coupon rate is below the market yield, the bond will trade below its par value or at a discount.

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