A bond will sell at a discount (below par value) if

Question

A bond will sell at a discount​ (below par​ value) if

BlackTom AI · Accepted Answer

When a bond trades at a discount (below par), its price is less than its face value. This occurs because investors require a higher return than the bond's coupon payments alone provide, so the market adjusts the price downward to meet the desired yield.

Option a: 'current market interest rates are moving in the same direction as bond values.' This statement describes a general relationship between rates and bond prices, but it doesn't explain why a discount occurs in terms of required return vs. coupon. Bonds can move with rates for various reasons, and discounts occur specifically when the required yield exceeds the coupon, not merely because rates and prices move in the same direction.

Option b: 'investor's current required rate of return is above the coupon rate of the bond.' This is the core reason a bond will sell at a discount. If the market requires a higher yield than the bond’s coupon payments provide, the price falls below par so that the overall yield to maturity aligns with that higher required return.

Option c: 'the market value of the bond is less than the present value of the discount rate of the bond.' This phrasing is confusing and technically incorrect. Present value comparisons involve cash flows discounted at the yield; stating the market value is less than the present value of the discount rate misstates the relationship and does not correctly define discount pricing.

Option d: 'the economy is booming.' An expanding or booming economy can influence interest rates and risk perceptions, but it is not a direct, sufficient condition for a bond to trade at a discount. Discounts are driven by the relationship between coupon payments and the current required yield, not merely macroeconomic conditions.

A bond will sell at a discount (below par value) ifSingle choice

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A bond will sell at a discount​ (below par​ value) ifSingle choice