All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.

All else being constant:

• A bond will sell at a premium when the yield to maturity is lower than the coupon rate.
• A bond will sell at a discount when the yield to maturity is higher than the coupon rate.

This relationship is based on the fact that the yield to maturity reflects the total return an investor can expect to receive from a bond if it is held until maturity, and it takes into account both the coupon payments and any capital gain or loss resulting from the difference between the face value and the purchase price. When the yield to maturity is lower than the coupon rate, investors are willing to pay a premium for the bond to capture the higher fixed interest payments. Conversely, when the yield to maturity is higher than the coupon rate, the bond may sell at a discount to compensate investors for the lower fixed interest payments compared to the market rate.