Questions: How does the relationship between a bond's coupon rate and its yield-to-maturity typically affect its price relative to par value? a. If the coupon rate is higher than YTM, the bond trades at a premium. b. If the coupon rate is lower than YTM, the bond trades at a premium. c. A higher coupon rate results in a lower price. d. YTM and coupon rate are always equal in an efficient market.

The answer is the first one (a): If the coupon rate is higher than YTM, the bond trades at a premium.

Explanation for each option:

a. If the coupon rate is higher than YTM, the bond trades at a premium.

• This is correct. When a bond's coupon rate is higher than its yield-to-maturity (YTM), it means the bond is offering more interest income than the current market rate. Investors are willing to pay more for this higher income, resulting in the bond trading at a price above its par value, or at a premium.

b. If the coupon rate is lower than YTM, the bond trades at a premium.

• This is incorrect. If the coupon rate is lower than the YTM, the bond offers less interest income than the current market rate. Therefore, it would trade at a discount, not a premium, to attract buyers.

c. A higher coupon rate results in a lower price.

• This is incorrect. A higher coupon rate generally results in a higher price, as the bond provides more interest income compared to other bonds with lower coupon rates.

d. YTM and coupon rate are always equal in an efficient market.

• This is incorrect. In an efficient market, the YTM and coupon rate are not always equal. The YTM reflects the bond's current market conditions and can differ from the coupon rate, which is fixed at issuance. The bond's price adjusts to reflect the difference between the coupon rate and the YTM.

In summary, the relationship between a bond's coupon rate and its yield-to-maturity affects its price relative to par value, with bonds trading at a premium when the coupon rate is higher than the YTM.