Asked by ariana marie on Apr 28, 2024
Verified
Lady 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 Lady bonds. Therefore, it must be true that:
A) The coupon rate on the Limbaugh bonds is equal to that on the Lady bonds.
B) The coupon rate on the Limbaugh bonds is higher than that on the Lady bonds.
C) The coupon payment on the Limbaugh bonds is lower than that on the Lady bonds.
D) The yield on Limbaugh bonds is higher than the yield on Lady bonds.
E) The Limbaugh bonds pay coupons more often than twice a year.
Coupon Bonds
Debt securities that pay holders a fixed interest rate (the coupon) on a periodic basis until the bond matures, at which point the principal amount is repaid.
Par
The face value of a bond or other financial instrument, typically the amount at which it will be paid out upon maturity.
Yield
The earnings generated from an investment, including interest or dividends, that result from owning a specific financial instrument.
- Acquire insight into how interest rates are related to bond prices and how variables like maturity, coupon rates, and yield to maturity play a role in determining bond value.
- Differentiate between premium and discount bonds based on market price relative to face value.
Verified Answer
PK
Pouya KouzehkananiMay 02, 2024
Final Answer :
B
Explanation :
Since Limbaugh Corp. bonds sell at a premium and are considered to have the same risk as Lady Products, Inc. bonds, it indicates that the coupon rate on Limbaugh bonds is higher than the 8% coupon rate on Lady bonds. Bonds sell at a premium when the coupon rate is higher than the current market interest rate.
Learning Objectives
- Acquire insight into how interest rates are related to bond prices and how variables like maturity, coupon rates, and yield to maturity play a role in determining bond value.
- Differentiate between premium and discount bonds based on market price relative to face value.