If the effective yield is lower than the nominal yield, the buyer will pay a:

Question

Options

• Apremium
• Bcredit
• Cdebt
• Dfee

• A
  70% (19)
• B
  4% (1)
• C
  19% (5)
• D
  7% (2)

Explanation

When a bond's effective yield (market rate) falls below its nominal yield (coupon rate), the bond pays more interest than the market currently requires, making it more attractive than new issues - so buyers must pay above face value, which is the definition of a premium. Options B (credit) and D (fee) are not standard bond pricing terms and have no relation to yield-price dynamics. Option C (debt) describes what a bond is, not how it's priced relative to yield differentials.

Memory tip: Think "low yield = high price" - if the coupon beats the market, you pay a premium for that advantage. Flip it: high effective yield means you pay a discount (less than face value) to compensate for the below-market coupon.

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