Which of the Following Bonds Is Trading at a Premium

question 83

Multiple Choice

Which of the following bonds is trading at a premium?

• A) a five-year bond with a $2,000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semiannually
• B) a ten-year bond with a $4,000 face value whose yield to maturity is 6.0% and coupon rate is 5.9% APR paid semiannually
• C) a 15-year bond with a $10,000 face value whose yield to maturity is 8.0% and coupon rate is 7.8% APR paid semiannually
• D) a two-year bond with a $50,000 face value whose yield to maturity is 5.2% and coupon rate is 5.2% APR paid monthly

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Definitions:

Market Rate of Return

The average rate of return expected by investors from a market or security index over a specific time period.

CAPM

Stands for the Capital Asset Pricing Model, a model that describes the relationship between the expected return of an asset and its risk.

Liquidity

The ease with which an asset can be converted into cash without significantly affecting its price.

Trading Costs

Expenses associated with the buying and selling of securities, including commissions, spreads, and slippage.