A $1,000 face value 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% and would sell for a discount if interest rates were greater than 11%.

Question

Quizplus · Accepted Answer

When interest rates are lower than the bond's coupon rate of 10% ($100 divided by $1,000), investors are willing to pay a premium for the bond because it provides a higher yield than what is currently available on the market. On the other hand, when interest rates exceed the bond's coupon rate, investors can receive a higher yield by buying other bonds with higher interest rates, and therefore the bond would sell at a discount. So, the statement is true.

A $1,000 Face Value Bond with a $100 Annual Interest