You can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. The price of the bond suggests that the expected return on bonds with this risk is lower than 10%.

Question

Quizplus · Accepted Answer

The price of the bond being less than its par value (at $800) and offering a 10% coupon rate when similar risk bonds are presumably offering lower yields suggests that the market expects a higher return from this bond to compensate for its risk or other market conditions, not lower. The bond's yield to maturity, in this case, would be higher than 10% to make it an attractive investment compared to others with lower expected returns.

You Can Buy a $1,000 Par Value Bond for $800