Final answer:
Bonds are sold at a discount when market interest rates exceed the bond's interest rate, due to the Present Discounted Value being less attractive to investors.
Step-by-step explanation:
When bonds are sold at a discount, this typically occurs because the prevailing market interest rates are higher than the interest rate of the bond. The concept of Present Discounted Value comes into play here, as investors are willing to pay less for a bond that offers lower returns than current market rates. When interest rates rise after the issuance of a bond, the existing bond's rate is comparatively lower, making it less attractive to investors. Therefore, it will sell for less than its face value, which is considered a discount. On the flip side, if interest rates fall, the same bond would have a higher relative rate and would sell at a premium.
The implications for capital projects fund are significant because bonds sold at a discount will require a higher interest expenditure over the life of the bond compared to bonds sold at par or at a premium. Understanding the dynamics of interest rates and bond values is crucial for investors and issuers alike, and highlights the importance of timing and market conditions when issuing debt securities for projects.