Question

Which assertions about statement 1 and statement 2 is true? Statement 1: 10,000 bonds sold by Echo Corporation were bought by a variety of investors. If Echo received $10 million from the sale of these bonds, then bonds were more likely sold on the secondary market than on the primary market. Statement 2: Bonds issued by Foxtrot have a face value of $1,000 and pay annual coupons with the next coupon due in 1 year. If the price of the bond is greater than $1,000, then the bond’s coupon rate is more than its YTM.

Answer 1

Answer: E. Statement 1 is false and statement 2 is true.

Explanation:

Statement 1 is false because when bonds are sold in the secondary market, the issuing company does not get anything from it. That is because sales in the secondary market are between bond holders and those who would like to buy the bond. For the company to make money from a bond issue, they would have to issue it in the Primary Market where it would come directly from them.

Statement 2 is true because when the coupon rate of a bond is higher than it's YTM, it signals that the bond is a PREMIUM bond which means that it is selling at a rate above Par. It is a measure showing that the bond is not very risky therefore investors charge less on the bond than the coupon rate. If the Coupon rate was lower than the YTM that would mean that investors consider the bond risky and so are charging more to hold it and this would reduce the price of the bond below it's face value.