Final Answer:
When an investor's required rate exceeds the bond's coupon interest rate, the bond's market value falls below its face value, resulting in a discount. This scenario occurs when the yield to maturity (YTM) surpasses both the current yield and the coupon rate.
Step-by-step explanation:
The relationship between a bond's market value and its coupon interest rate is pivotal in determining whether the bond sells at a premium, par, or discount. Bonds typically pay fixed interest known as the coupon rate. When an investor's required rate of return, often represented by the yield to maturity (YTM), is higher than the bond's coupon rate, the bond becomes less attractive in the market. This leads to a situation where investors are willing to pay less for the bond, causing its market value to decrease below the face value. Consequently, the bond sells at a discount.
The yield to maturity reflects the total return anticipated on a bond if it is held until maturity. If the YTM surpasses the current yield and the coupon rate, it signifies that the bondholder's expected rate of return is higher than the coupon payments the bond offers. This condition makes the bond less appealing to investors purchasing it at its face value or a premium.
As a result, the bond sells at a lower market price to adjust for the difference in yields, leading to a scenario where the YTM exceeds both the current yield and the coupon rate. This situation is characteristic of bonds trading at a discount in the market.