E
Exam Bank Practice Exam Bank →
Home › Exam FM › Bonds — premium, discount, and book-value behavior

How to Solve Bonds — premium, discount, and book-value behavior Questions on Exam FM

Exam FM Topic: Bonds — premium, discount, and book-value behavior Verified Procedural Question
Sample Practice Problem ID: #NANC6
A redemption-at-par bond has a coupon rate greater than its yield rate. At successive coupon dates, what is the general path of its book value toward maturity?
(A)It remains equal to the redemption value
(B)It increases toward the redemption value
(C)It alternates above and below the redemption value
(D)It decreases toward the redemption value
(E)It remains equal to the purchase price
📖 Worked Solution & Strategy
Reasoning Compare the coupon rate with the yield rate. Excess coupon amortizes a premium downward, while insufficient coupon causes a discount to accumulate upward toward redemption.
Application Coupon rate above yield makes the bond sell at a premium. Each period the excess coupon amortizes part of that premium, so book value moves downward toward redemption value. Answer The answer is It decreases toward the redemption value, option (D).

Final Answer: Option (D)

Unlock Full Step-by-Step Solution & Practice

Get instant access to this worked derivation plus procedurally generated practice questions for Exam FM.

Go to Home Page → Start Practice Now →

© Exam Bank — Procedural Practice Bank for Actuarial Exams (P and FM).

XML Sitemap • Home • Start Practice