A bond with a $100 annual interest payment with five years to maturity (not expected to default) would sell for a premium if interest rates were below 9 percent and would sell for a discount if interest rates were greater than 11 percent.

Question

Quizplus · Accepted Answer

This statement is correct because when interest rates are below the bond's coupon rate of 10 percent, the bond becomes more attractive and demand for it increases, causing its price to rise and sell at a premium. Conversely, when interest rates rise above the bond's coupon rate, the bond becomes less attractive, which reduces demand and causes its price to fall, selling at a discount.

A Bond with a $100 Annual Interest Payment with Five