When the market's required rate of return for a particular bond is much less than its coupon rate, the bond is selling at:
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A. B. C. D.A
When a bond's required rate of return (also known as the yield to maturity) is less than its coupon rate, the bond is selling at a premium.
To understand this, it's important to know the relationship between a bond's price and its yield to maturity. Yield to maturity is the total return anticipated on a bond if it is held until it matures. This includes both the interest payments received from the bond (the coupon rate) and any capital gain or loss from the bond's price fluctuation.
As the yield to maturity on a bond decreases, the bond becomes more valuable because it offers a higher coupon rate than other bonds in the market. Investors are willing to pay more than the face value of the bond to earn that higher interest rate. This means the bond is selling at a premium.
On the other hand, when a bond's required rate of return is higher than its coupon rate, the bond is selling at a discount. In this case, investors are not willing to pay the full face value of the bond because it offers a lower interest rate than other bonds in the market.
To summarize, a bond selling at a premium means that it is currently priced higher than its face value because its coupon rate is higher than the required rate of return, while a bond selling at a discount is priced lower than its face value because its coupon rate is lower than the required rate of return.