Question
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Answer
The statement is False.
Solution
To determine whether the statement is true or false, we need to analyze the relationship between the selling price of the bonds, their face value, and the yield-to-maturity (YTM) compared to the coupon rate.
Known Conditions:
- Face Value of Bonds (F): $1,000
- Current Selling Price §: $1,218.47
- Time to Maturity (t): 20 years - 5 years = 15 years
- Coupon Rate: Not explicitly given, but we can infer it based on the selling price and face value.
Analysis:
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Understanding Bond Pricing:
- When bonds are selling for more than their face value (in this case, $1,218.47 > $1,000), it typically indicates that the coupon rate is higher than the current market interest rates. This is because investors are willing to pay a premium for the higher interest payments.
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Yield-to-Maturity (YTM):
- The YTM is the total return anticipated on a bond if it is held until it matures. It takes into account the bond’s current market price, its face value, the coupon payments, and the time remaining until maturity.
- If the YTM is greater than the coupon rate, the bond would sell at a discount (less than face value). Conversely, if the YTM is less than the coupon rate, the bond would sell at a premium (more than face value).
Conclusion:
Since the bonds are currently selling for $1,218.47, which is greater than the face value of $1,000, we can conclude that the coupon rate must be greater than the yield-to-maturity. Therefore, the statement that “the Quality Construction Products Inc. bonds have a yield-to-maturity greater than the coupon rate on these bonds” is False.
Thus, the final answer is:
False.
Answered by UpStudy AI and reviewed by a Professional Tutor
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Explain 
Simplify this solution Extra Insights
Actually, the statement is incorrect! If the bonds are currently selling for $1,218.47, which is above their face value of $1,000, it means that they must be providing a lower yield to maturity than the coupon rate. Investors are willing to pay a premium for these bonds because the coupon payments are higher than what new bonds are offering in the current market.
For a fun twist, this is akin to a popular bakery selling a pie (the bond) that everyone loves for a price higher than its usual slice! Why? Because it tastes so good (high coupon payments) that people are willing to pay extra, leading to a lower yield overall as compared to other less tasty options.
