A bond has a coupon rate of 12 percent, face value of $1000 and an yield-to-maturity of

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Question:

A bond has a coupon rate of 12 percent, face value of $1000 and an yield-to-maturity of 11 percent.

(a) Explain clearly and completely whether the bond will sell for a premium, discount, or par today and why it will do so. Please explain your reasoning clearly and completely, and if you cite a rule explaining the reasoning behind the rule.

(b) Suppose this bond’s yield-to-maturity of 11 percent today represents an increase from 9 percent last month. Does this mean that the bond’s default risk must has increased? Discuss fully.