Consider a coupon bond that sold at par value two years ago. If interest rates are much higher 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 rise, the present value of a bond's future cash flows decreases, causing the bond's price to fall below its par value. If the bond was issued at par, its coupon rate was equal to the prevailing interest rates at that time. Now, with higher interest rates, the coupon rate is below the current rates.

Consider a Coupon Bond That Sold at Par Value Two