Canadian Securities Course (CSC) Practice Exam

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When does a bond sell at a premium?

  1. If the bond price is less than $1000

  2. When YTM is lower than the coupon rate

  3. Current yield is low

  4. When interest rates decrease

The correct answer is: When YTM is lower than the coupon rate

A bond sells at a premium when its yield to maturity (YTM) is lower than the coupon rate. This means that the bond is offering a lower interest rate than what is currently available in the market. Options A and C are incorrect because they do not specifically relate to the relationship between YTM and coupon rate. Option D may seem like a possible answer, but it does not specifically address the premium price of a bond. In fact, when interest rates decrease, bond prices may increase, however, this does not necessarily mean the bond is selling at a premium. Therefore, B is the most accurate answer.

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