Bond X and Bond Y were issued at a premium to par value three years ago. Bond X matures in five years, and Bond Y matures in ten years. Both bonds carry the same credit rating. Bond X has a coupon of 7.25%, and Bond Y has a coupon of 8.00%. Currently the required yield for both bonds is 7.60%. Determine whether each bond is currently priced at a premium or discount to par value.
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A. B. C.C
To determine whether each bond is currently priced at a premium or discount to par value, we need to compare the coupon rate of each bond to the current required yield.
A bond is considered to be priced at a premium when its coupon rate is higher than the current required yield. This means that the bond is offering a higher interest rate than what investors are currently demanding, making it more attractive. On the other hand, a bond is considered to be priced at a discount when its coupon rate is lower than the current required yield. This indicates that the bond is offering a lower interest rate than what investors are demanding, making it less attractive.
Let's analyze each bond:
Bond X:
Since the coupon rate of Bond X (7.25%) is lower than the current required yield (7.60%), Bond X is priced at a discount to par value.
Bond Y:
In the case of Bond Y, the coupon rate (8.00%) is higher than the current required yield (7.60%), indicating that Bond Y is priced at a premium to par value.
Therefore, the correct answer is:
C. Bond X is priced at a discount, and Bond Y is priced at a premium.