The price of a bond at any given point will be ___________ than its face value if coupon rate is _____________ than its yield to maturity. (Select all that apply).
1) Lower, lower
2) Lower, higher
3)Higher, higher
4) Higher, lower
1,4
To determine the price of a bond, you need to consider the relationship between its coupon rate and yield to maturity (YTM). The coupon rate is the fixed interest rate paid by the bond, typically expressed as a percentage of its face value. The YTM is the total return anticipated on the bond if held until maturity.
When the coupon rate is:
1) Lower than the YTM: The bond is offering a lower interest rate than the market rate of return. In this case, the price of the bond will be lower than its face value. This is because investors can earn a higher rate of return by investing in other opportunities in the market, so they will only be willing to pay a discounted price for the bond.
2) Higher than the YTM: The bond is offering a higher interest rate than the market rate of return. In this case, the price of the bond will be higher than its face value. This is because investors are receiving a higher coupon payment compared to the market rate of return, making the bond more attractive, and thus they are willing to pay a premium price for it.
Therefore, the correct options are:
1) Lower, lower
4) Higher, lower