If a bond trades at a premium, which statement is true about its yield relative to its coupon rate?

• A. The yield is higher than the coupon rate.
• B. The yield is equal to the coupon rate.
• C. The yield is unpredictable.
• D. The yield is lower than the coupon rate.

Answer: (D)

When a bond trades at a premium, its price is higher than its face value, and the fixed coupons don’t rise with that higher price. You’re paying more upfront to receive the same set of coupon payments and the face value at maturity, so the overall return compared with the price you paid is smaller. That’s why the yield ends up lower than the coupon rate.

For example, if the bond has a par value of 100 and a coupon of 6% (paying $6 annually), but it trades at 110, the current yield is about $6/$110 ≈ 5.45%, which is below the 6% coupon. The yield to maturity would be even closer to, but still below, the coupon depending on remaining time to maturity and redemption at par. In short, premium pricing drives yield below the coupon rate.