A bond issued by Greenview Corporation has a coupon interest rate of 6%. The pre

Question

A bond issued by Greenview Corporation has a coupon interest rate of 6%. The present yield to maturity on similar bonds is 7%. Given this information, what can you determine regarding Greenview Corporation's bond?

Select one:

a. Greenview Corporation's bond will sell at a price above par.

b. Greenview Corporation's bond will sell at a price that is equal to the face value of the bond plus the value of all interest payments.

c. Greenview Corporation's bond will sell at a price below par.

d. Greenview Corporation's bond will sell at a price equal to par.

Explanation / Answer

Market price and yield to maturity (YTM) are inversely related. This statement has been explained below:

1) If coupon rate is greater than YTM, this implies that the bond is trading at premium. In other words, if coupon rate is greater than YTM, then market price of the bond will be higher than the face value of the bond.

2) If coupon rate is lower than YTM, this implies that the bond is trading at a discount. In other words, if coupon rate is lower than YTM, then market price of the bond will be lower than the face value of the bond.

3) If coupon rate is equal to YTM, this implies that the market price of the bond is equal to its face value.

In the given question, greenview corporation’s bond has an interest rate of 6% and YTM of 7%, as YTM (7%) is greater than coupon rate (6%) the bond will trade at a discount or in other words, the market price of the bond will be lower than its face value. Therefore in the above question option C is the correct answer which says greenview corporation bond will sell at a price below par.

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