Liddy Products, Inc. just issued 10-year, 8% coupon bonds at par. Outstanding Li

Question

Liddy Products, Inc. just issued 10-year, 8% coupon bonds at par. Outstanding Limbaugh Corp. bonds, which have a maturity of 10 years, sell at a premium to par and are viewed by investors as having the same risk as the Liddy bonds. Therefore, it must be true that:

a.     The coupon rate on the Limbaugh bonds is equal to that on the Liddy bonds.

        b.     The coupon rate on the Limbaugh bonds is higher than that on the Liddy bonds.

        c.     The coupon payment on the Limbaugh bonds is lower than that on the Liddy bonds.

        d.     The yield on Limbaugh bonds is higher than the yield on Liddy bonds.

        e.     The Limbaugh bonds pay coupons more often than twice a year.

Explanation / Answer

b.     The coupon rate on the Limbaugh bonds is higher than that on the Liddy bonds.

answer is b, as bonds are Limbaugh  selling at premium, so coupon rate is greater than that of Liddy bonds

ans:b

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