Answer: A. The new bonds will be issued at a premium to the current price of the 7% bonds
Explanation:
The New Bonds will have a coupon of 10% which will be higher than the 7% that was previous on offer for the same type of bonds.
This means that the same type of bond is giving a greater return than before. Investors will therefore want more of the bond giving out better returns and will not mind paying a higher price to get it.
For this reason, the bonds issued this year with a 10% coupon will sell at a Premium (higher than) the bonds that were issued years ago that only have a coupon rate of 7%.
