Final answer:
A bond sold for more than its face value is sold at a premium. This occurs when market interest rates fall below the bond's coupon rate, making it more valuable than new bonds issued at the lower current rates. The correct option is 'c. A premium'.
Step-by-step explanation:
When the selling price of a bond is more than its face value, the bond is sold at a premium. This situation typically occurs when the market interest rates have fallen below the bond's coupon rate since issuance. Hence, the bond's future cash flows are more valuable compared to new bonds issued at current lower rates. This increased value is reflected in the bond's premium price. The concept of Present Discounted Value (PDV) is essential in understanding this phenomenon, as it involves calculating the worth of future cash flows in today's dollars, incorporating the prevailing interest rates.
Financial Markets illustrate that if after a bond is issued, the interest rate falls, investors have a bond with a locked-in higher rate compared to new bonds. Because of this, such a bond would command a higher price than its face value, selling at a premium. Conversely, if the interest rates rise, the bond's desirability diminishes, and it would sell at a discount.
The correct option for a bond selling for more than its face value is 'c. A premium'.