A bond has a $1, 000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default.The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

Question

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The bond's coupon rate is 10% ($100 annual interest / $1,000 par value), so if market interest rates are below 10%, the bond offers a higher return than current market rates, making it more valuable and causing it to sell at a premium. Conversely, if market rates are above 10%, the bond's return is less attractive, leading it to sell at a discount.

A Bond Has a $1, 000 Par Value, Makes Annual