How does the bond price relate to the redemption value if the Gross Redemption Yield (GRY) exceeds the coupon rate?

How does the bond price relate to the redemption value if the Gross Redemption Yield (GRY) exceeds the coupon rate?

• A. The bond price will be equal to the redemption value
• B. The bond price will be higher than the redemption value
• C. The bond price will be lower than the redemption value
• D. The bond price will fluctuate independently

Answer: (C)

When the Gross Redemption Yield (GRY) exceeds the coupon rate, it indicates that investors require a return from the bond that is greater than what the bond is providing through its periodic coupon payments. In such a case, the bond is priced at a discount to its redemption value, which is the amount that will be received at maturity. This situation arises because investors are willing to pay less for a bond that offers lower coupon payments relative to the market's requirement for yield. Consequently, as the GRY rises above the coupon rate, the bond's market price decreases to ensure that the yield (taking into account both the purchase price and the redemption value) meets investors' expected return. Therefore, under these conditions, the bond price will indeed be lower than the redemption value, making this the correct answer.

When the Gross Redemption Yield (GRY) exceeds the coupon rate, it indicates that investors require a return from the bond that is greater than what the bond is providing through its periodic coupon payments. In such a case, the bond is priced at a discount to its redemption value, which is the amount that will be received at maturity.

This situation arises because investors are willing to pay less for a bond that offers lower coupon payments relative to the market's requirement for yield. Consequently, as the GRY rises above the coupon rate, the bond's market price decreases to ensure that the yield (taking into account both the purchase price and the redemption value) meets investors' expected return.

Therefore, under these conditions, the bond price will indeed be lower than the redemption value, making this the correct answer.