Company XYZ has issued bonds that carry a coupon rate of 4% and are yielding...

XYZ’s bonds have a 4% coupon but are yielding 9%, which means the bonds are trading at a discount. A bond’s coupon rate is fixed, but its yield changes with market price. When a bond’s yield is higher than its coupon, the bond must be priced below par so the investor’s return increases to the market-required level. The fact that similar bonds in the same industry and maturity range are yielding only about 5% suggests that investors require a much higher return from XYZ. That higher required yield is most likely due to comparatively lower credit quality or higher perceived default risk. Choice A is correct. Choice B is internally inconsistent because higher credit quality would normally produce a lower yield, not a much higher yield. Choices C and D are incorrect because a bond yielding more than its coupon is not trading at a premium; it is trading at a discount. The SIE outline requires knowledge of debt instruments, coupon value, yield, ratings, rating agencies, credit risk, and the relationship between price and yield. Reference: Section 2.1.2 Debt Instruments; Section 2.2 Investment Risks, Credit Risk.