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 are 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 its face value, resulting in a price increase. This is because the investor is receiving a higher interest rate than the current market rate. Therefore, the price of the bond increases to reflect its increased value.

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