Answered: Given that market interest rates is…

Given that market interest rates is higher then bond's coupon rate, the bond will: sell for less than par value. sell for more than par value. decrease its coupon rate. increase its coupon rate.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 2Q: Short-term interest rates are more volatile than long-term interest rates, so short-term bond prices...

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Question

Given that market interest rates is higher then bond's coupon rate, the bond will:
sell for less than par value.
sell for more than par value.
decrease its coupon rate.
increase its coupon rate.

Expert Solution

Step 1

The price of bond is sum of present value of the future cash flow from its coupons and the present value of its maturity value. It is the determined based on the effective interest rate and the stated interest rate. If the effective rate is higher than the stated coupon rate the bonds are sold at a discount an vice versa.

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