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

The selling at a premium to par would have YTM (Yield to Maturity) less than its coupon rate. In the given case, the bond selling at premium and its risk profile is similar to bonds selling at par. Therefore, its coupon rate must be higher.

Therefore, the correct answer is option b.

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