Bond yield question

FINRA FINRA Series 66
1

If your client purchased a U.S. government bond with a YTM of 4%, and a coupon of 5%. Later he sells the bond at a price producing a YTM of 6%. This indicates that when your client originally purchased the bond it was trading at a:

A Discount but at the time of sale it was trading at a premium
B Premium but at the time of sale it was trading at a discount
C Premium and it was still trading at a premium at the time of sale
D Discount and it was still trading at a discount at the time of sale

I chose A and I was wrong. I thought at purchased with a YTM 4% reference to the coupon at 5%, that’s a discounted bond. Then it sold at 6% which is higher than the coupon, I thought that is premium.

Somehow the answer is B. I don’t get this. Am I missing something here? Please help.

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Hey @A11,

It might be helpful to review our Series 66 page on the Bond seesaw.

Once you’ve memorized the seesaw, you can just plug in the numbers into the line to see how it balances.

At purchase, the bond had a coupon (nominal yield) of 5% and a YTM of 4%, meaning that it traded at a premium.

At sale, the bond had a coupon (nominal yield) of 5% and a YTM of 6%, meaning that it traded at a discount.

The “trick” to this question is that the YTM isn’t the bond’s sale price - it’s the bond’s Yield To Maturity.

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Thank you. I guess when you separate them. Then I see what you mean.

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