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NISM Certifications · NISM-Series-XV: Research Analyst · Terminology in Equity and Debt Markets

In bond market terminology, a bond whose coupon rate is lower than its yield to maturity will generally trade at which of the following relative to face value?

A bond whose coupon rate is below its yield to maturity trades at a discount to face value, because investors require a higher return than the coupon provides, so the present value of its cash flows is less than the face value.

  1. AAt a discount to face valueCorrect
  2. BAt a premium to face value
  3. CExactly at face value
  4. DAt a price equal to its accrued interest

Explanation

When the required yield exceeds the coupon rate, the present value of the bond's cash flows is below face value. So the bond trades at a discount. A premium arises only when the coupon exceeds the yield.

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