What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?
A)The price of the bond increases
B)The coupon rate of the bond increases
C)The par value of the bond decreases
D)The coupon payments will be adjusted to the new discount rate

Question

Quizplus · Accepted Answer

When a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate, it means that the bond is more valuable than a similar bond with a higher discount rate. Investors will be willing to pay more than the face value of the bond to receive the bond's relatively high interest payments. This results in the price of the bond increasing.

What Happens When a Bond's Expected Cash Flows Are Discounted