A bond was issued at a par value of $1,000 when the interest rate for similar bonds was 8%. Presently, new bonds issued with a similar creditworthiness have a 10% interest rate. Which of the following statements about the bond is most likely to be true?
A) It is currently selling for a premium.
B) It is currently selling at a discount.
C) It is currently selling at par.
D) It is likely to be retired.
E) The bond's coupon rate will increase.

Question

Quizplus · Accepted Answer

When new bonds are issued with a higher interest rate than the bond in question, its value decreases as it becomes less attractive to investors. As a result, the bond is likely selling at a discount. The coupon rate, which is fixed at the time of issuance, will not increase. There is no information to suggest that the bond will be retired. The fact that the bond was issued at par value is irrelevant to its current value.

A Bond Was Issued at a Par Value of $1,000