A bond is issued at $1,000 par value during a time in which interest rates for similar bonds were 8%.Today new bonds issued with a similar credit worthiness is 10%.Which of the following is most likely to be true about the bond.

Question

Quizplus · Accepted Answer

The bond was issued when interest rates were 8%, which means that its coupon rate (the interest rate it pays to bondholders) is also 8%. However, current interest rates for similar bonds are 10%, which means that investors can get a better return on their investment by buying newer bonds. As a result, the demand for the 8% bond decreases, and its price falls. Therefore, the bond is currently selling at a discount.

A Bond Is Issued at $1,000 Par Value During a Time