Consider a coupon bond that sold at par value two years ago. If interest rates are much lower now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bonds will be ____ its par value.

Question

Quizplus · Accepted Answer

When interest rates decrease, the coupon rate of the bond, which was set when rates were higher, will be above the current prevailing rates. Consequently, the present value of the bond will be above its par value because the bond's fixed coupon payments are more attractive compared to the new lower rates.

Consider a Coupon Bond That Sold at Par Value Two