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Given that the coupon rate of a bond is higher than the market interest rate on bonds with similar maturities and payment structures, the bond will be trading:

A)
at a premium.

B)
at a discount.

C)
at par value.

If the bond provides investors with a higher coupon rate than the market interest rate the bond has to be trading at a premium relative to its par value otherwise there is an arbitrage opportunity.

If the market rate of interest is greater than the coupon rate, the bond will be valued:

If the Coupon Rate > market yield, then bond will sell at a premium.
If the Coupon Rate < market yield, then bond will sell at a discount.
If the Coupon Rate = market yield, then bond will sell at par.

Gabrielle Daniels and Edin Roth, CFA candidates, are discussing the relationship between a bond’s coupon rate and the required market yield. Looking through the local newspaper, they see a new-issue, 10-year, $1,000 face value 8% semi-annual coupon bond priced at $950. Daniels makes the following statements. Which statement does Roth tell her is correct?

A)	The bond is selling at a premium.

B)	The current market required rate is less than the coupon rate.

C)	The bond is selling at a discount.

When the issue price is less than par, the bond is selling at a discount.

We also know that the current market required rate is greater than the coupon rate because the bond is selling at a discount.

Kirsten Thompson, CFA candidate, is studying the relationships between a bond’s coupon rate and the required market yield. One study question concerns a new-issue, 15-year, $1,000 face value 6.75% semi-annual coupon bond priced at $1,075. Which of the following choices describes the bond and the relationship of the bond’s market yield to the coupon?

A)	Discount bond, required market yield is greater than 6.75%.

B)	Premium bond, required market yield is less than 6.75%.

C)	Premium bond, required market yield is greater than 6.75%.

When the issue price is greater than par, the bond is selling at a premium. We also know that the current market required rate is less than the coupon rate of 6.75%, because the bond is selling at a premium.

For the examination, remember the following relationships:

Type of Bond Market Yield to Coupon Price to Par

Premium Market Yield < Coupon Price> Par

Par Market Yield = Coupon Price = Par

Discount Market Yield> Coupon Price < Par

Jonathon Silver, CFA, has a client, Alyce Grossberg, whose only current investment requirement is that she wants to buy a premium bond. The required market yield is currently 7.25% at all maturities. Which of the following $1,000 face value bonds should Silver select for Grossberg’s portfolio? A

A)	15-year, zero-coupon bond priced to yield 9.00%.

B)	10-year, 8.00% semi-annual coupon bond.

C)	10-year, 7.00% semi-annual coupon bond.

A bond sells at a premium when the coupon rate is greater than the required market yield. Here, the 10-year, 8.00% semi-annual coupon bond would sell above par, or at a premium.

The 15-year, zero-coupon bond priced to yield 9.00% would sell at a discount. Zero-coupon bonds sell at a discount from par, because they pay no coupon. (Coupon rate = 0.00%.) The 10-year, 7.00% semi-annual coupon bond would also sell at a discount, because the coupon rate is less than the required market yield. Note: The information that this is an annual coupon bond is not relevant for this question.

For the examination, remember the following relationships:

Type of Bond Market Yield to Coupon Price to Par

Premium Market Yield < Coupon Price> Par

Par Market Yield = Coupon Price = Par

Discount Market Yield> Coupon Price < Par

Type of Bond	Market Yield to Coupon	Price to Par
Premium	Market Yield < Coupon	Price> Par
Par	Market Yield = Coupon	Price = Par
Discount	Market Yield> Coupon	Price < Par