The correct answer is D, YTM is less than coupon rate. When a bond is selling at a premium, it means the bond’s market price is above its par value. This occurs when the bond’s coupon rate is higher than prevailing market interest rates, making the bond more attractive to investors.
Step-by-step, premium bond relationships follow a consistent pattern:
Coupon rate > Current yield > Yield to maturity (YTM)
This happens because investors are paying more than par value for the bond but will only receive par at maturity. The excess paid (premium) reduces the overall return, causing the YTM to be the lowest yield measure.
Choice A is incorrect because a premium bond has a market value greater than par, not less. Choice B is incorrect because the coupon rate is always higher than current yield for premium bonds. Choice C is incorrect because the coupon rate is also higher than YTM, not lower.
Thus, the defining characteristic of a premium bond is that its yield to maturity is less than its coupon rate, making Answer D correct.
