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Memphic Memphic
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6 years ago
A 3 year default free security with a face value of $1000 and an annual coupon rate of 6% will trade:
A) at a discount.
B) at a premium.
C) at par.
D) There is insufficient information provided to answer this question.
Textbook 
Corporate Finance: The Core

Corporate Finance: The Core


Edition: 4th
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#1
6 years ago
B
Explanation:  B) P = 60/1.058 + 60/1.0552 + 1060/1.0523 = 1021.07 which is greater than $1000, so it trades at a premium.  The other way to answer this question is to simply note that the coupon rate is greater than any of the zero coupon yields during the first three years so its must trade at a premium.
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