A bond will sell at a discount (below par value) if

Question

A bond will sell at a discount​ (below par​ value) if

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When a bond trades at a discount (below par), its price is less than its face value. This occurs because investors require a higher return than the bond's coupon payments alone provide, so the market adjusts the price downward to meet the desired yield.

Option a: 'current market interest rates are moving in the same direction as bond values.' This statement describes a general relationship between rates and bond prices, but it doesn't explain why a discount occurs in terms of required return vs. coupon. Bonds can move with rates for various reasons, and discounts occur specifically when the required yield exceeds the coupon, not merely because rates and prices move in the same direction.

Option b: 'investor's current required rate of return is above the coupon rate of the bond.' This is the core reason a bond will sell at a discount. If the market requires a higher yield than the bond’s coupon payments provide, the price falls below par so that the overall yield to maturity aligns with that higher required return.

Option c: 'the market value of the bond is less than the present value of the discount rate of the bond.' This phrasing is confusing and technically incorrect. Present value comparisons involve cash flows discounted at the yield; stating the market value is less than the present value of the discount rate misstates the relationship and does not correctly define discount pricing.

Option d: 'the economy is booming.' An expanding or booming economy can influence interest rates and risk perceptions, but it is not a direct, sufficient condition for a bond to trade at a discount. Discounts are driven by the relationship between coupon payments and the current required yield, not merely macroeconomic conditions.

MCD2170 Foundations of Finance - Trimester 3 - 2025

A bond will sell at a discount (below par value) if

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MCD2170 Foundations of Finance - Trimester 3 - 2025

A bond will sell at a discount​ (below par​ value) if

View Explanation

Log in for full answers

Similar Questions

As interest rates rise, the market price of your bond is also likely to rise.

You have purchased a bond with a ​7% annual coupon rate for ​$1,060. What will happen to the​ bond's price if market interest rates​ rise?

On January 1st, 2005, Borrower Limited sold a 10%, five-year, $100 million bond when bonds of equivalent risk and maturity were yielding 5% annually. Interest payments are made on January 1st next year. What is the Price of the Bond?

All bonds considered below have a face value of $1000. The two-year zero-coupon bond is trading at $906.86 while the two-year bond with annual coupon rate 3% is trading at $962.96. In the absence of arbitrage, what is the fair price of the one-year zero-coupon bond?

A company releases a five-year bond with a face value of​ $1000 and coupons paid semi-annually. If market interest rates imply a YTM of​ 6% p.a., which of the following annual coupon rates will cause the bond to be issued at a​ premium?

A 7-year, 5% coupon bond (payable semi-annually) that was issued 4 years ago is presently trading at a YTM of 9%. Bond has a face value of $1000. Compute the bond's price.

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

A bond will sell at a discount (below par value) if

You have purchased a bond with a 7% annual coupon rate for $1,060. What will happen to the bond's price if market interest rates rise?

A company releases a five-year bond with a face value of $1000 and coupons paid semi-annually. If market interest rates imply a YTM of 6% p.a., which of the following annual coupon rates will cause the bond to be issued at a premium?