If bonds' coupon rate is higher than the market rate, the bonds are traded at:

If bonds' coupon rate is higher than the market rate, the bonds are traded at:

• A. A premium
• B. A discount
• C. Par value
• D. Par premium

Answer: (A)

Bond prices move to align the fixed coupon payments with current market rates. If a bond’s coupon is higher than the going market rate for similar risk, investors are willing to pay more than the face value to receive that higher coupon, so the price rises above par. That higher price is called trading at a premium. If the coupon were lower than the market rate, the bond would trade at a discount (below par); if it matched the market rate, it would trade at par. The term “par premium” isn’t used in this context.

Bond prices move to align the fixed coupon payments with current market rates. If a bond’s coupon is higher than the going market rate for similar risk, investors are willing to pay more than the face value to receive that higher coupon, so the price rises above par. That higher price is called trading at a premium. If the coupon were lower than the market rate, the bond would trade at a discount (below par); if it matched the market rate, it would trade at par. The term “par premium” isn’t used in this context.