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CFA Level I · CFA Level I Exam · Interest Rate Risk and Return

A bond with a coupon rate above its yield to maturity trades at a premium. Assuming the yield to maturity stays constant and the issuer does not default, the bond's price is most likely to:

The price will decline toward par as maturity approaches. A premium bond pays coupons above the market yield, and as fewer of those excess coupons remain, the premium shrinks. At constant yield the price converges to par value on the maturity date.

  1. Arise above its premium level
  2. Bdecline toward par value as maturity approachesCorrect
  3. Cremain constant until maturity

Explanation

With a constant yield, the carrying price follows a constant-yield trajectory: premium bonds amortize down and reach par at maturity. Price staying constant ignores the shrinking number of above-market coupons remaining. Price rising would imply a yield decline, which contradicts the assumption.

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