When the market interest rate exceeds the coupon rate, bonds sell for less than face value to provide enough compensation to investors.

Question

Quizplus · Accepted Answer

This is because the interest rate is a key determinant of bond prices. When the market interest rate increases, the present value of future cash flows from a bond decreases, resulting in a lower price. To attract investors, the bond's price must fall further to provide a higher yield or return on investment, which is done by selling the bond at a discount to its face value.

When the Market Interest Rate Exceeds the Coupon Rate, Bonds