Final answer:
The correct multiple choice option is 'less than par.' This is because the bond's market price would be greater than its PV due to the expected return exceeding the required return. However, given higher market interest rates, the bond would sell at a discount, thus, less than face value. The bond's market price is less than its PV.
Step-by-step explanation:
The question revolves around the valuation of a corporate coupon bond and the relationship between its market price, expected return, and required return. The bond in question has an expected return of 11 percent but a required return of 10 percent. This discrepancy between expected and required return indicates that the bond is predicted to perform better than what is demanded by the market.
Consequently, the bond's market price would be greater than its present value (PV). Given that the expected cash flow from the bond one year from now is $1,080 and considering a 12% alternative investment option, the bond's price would not exceed $964, as that is the amount needed to be invested elsewhere to yield the same future value. This assessment implies that the bond would sell for less than face value when market interest rates are higher than the bond's coupon rate.
If we see a situation where the market interest rate is higher than the bond's coupon rate, the bond's price falls below par to adjust for the higher yield demanded by investors. Such an adjustment ensures the total return reflects current market conditions. In contrast, if market rates fall below the bond's coupon rate, the bond price would increase to align the yield with the prevailing market rates. This inverse relationship between bond prices and interest rates is crucial in bond valuation.
Considering the provided information and market dynamics, the correct multiple choice option that fits this scenario is: "less than par". This is because a bond tends to trade at a discount (below its face value) when the market interest rate exceeds the bond's coupon rate.