You asked: Which of the following is true when a bond is trading at a discount?

When a bond is trading at a discount?

Bonds are sold at a discount when the market interest rate exceeds the coupon rate of the bond. To understand this concept, remember that a bond sold at par has a coupon rate equal to the market interest rate.

Which of the following is true when a bond is trading at a discount ?*?

As a bond becomes discounted or decreases in price, it means its coupon rate is lower than current yields. Conversely, if current interest rates fall below the coupon rate offered on an existing bond, the bond will trade at a premium or a price higher than face value.

When a bond is trading at a discount the current yield on the bond is?

When a bond is purchased at face value, the current yield is the same as the coupon rate. But let’s say the bond was purchased at a discount to face value – Rs 900. The current yield would be 6.6% (Rs 60/ Rs 900).

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When a bond is trading at a discount the current yield on the bond is quizlet?

For premium bonds, the current yield exceeds the YTM; for discount bonds the current yield is less than the YTM; and for bonds selling at par value, the current yield is equal to the YTM. In all cases, the current yield plus the expected one-period capital gains yield of the bond must be equal to the required return.

How is a bond valued?

Bond Valuation in Practice

Bond valuation, in effect, is calculating the present value of a bond’s expected future coupon payments. The theoretical fair value of a bond is calculated by discounting the future value of its coupon payments by an appropriate discount rate.

Is it better to buy a bond at discount or premium?

Your buyer will pay more to purchase the bond, and the premium they pay will reduce the yield to maturity of the bond so that it is in line with what is currently being offered. On the other hand, a bond discount would enhance, rather than reduce, its yield to maturity.

Which one of the following is another name for a junk bond?

Junk bonds are also called high-yield bonds since the higher yield is needed to help offset any risk of default.

How do you calculate callable bonds?

How to Calculate for a Callable Bond

  1. Add 1 to the bond’s coupon rate. …
  2. Raise this value to the power of the number of years before the issuer calls the bond. …
  3. Multiply this factor by the bond’s face value. …
  4. Subtract the bond’s call price, which usually matches the bond’s par value.
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What is discount on bonds payable?

The discount on bonds payable is the difference between the face amount of a bond and the reduced price at which it was sold by the issuer. This happens when investors need to earn a higher effective interest rate than the stated interest rate associated with a bond.

How is the bond market doing 2020?

Stocks have staged a furious rally since bottoming in late March, but bonds are still winning the race for returns this year. Despite a 47% rise since March 23, the S&P 500 is up just 2.1% in 2020. … The Fidelity U.S. Bond Index Fund is up 7.1% this year, while the iShares U.S. Treasury Bond ETF has risen 9%.

How YTM is calculated?

YTM = the discount rate at which all the present value of bond future cash flows equals its current price. … However, one can easily calculate YTM by knowing the relationship between bond price and its yield. When the bond is priced at par, the coupon rate is equal to the bond’s interest rate.

What is yield rate in bond?

A bond’s yield is the rate of return the bond generates. A bond’s coupon rate is the rate of interest that the bond pays annually.

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