Final answer:
When a bond is trading for less than its face value, it indicates that the bond is trading at a discount. This typically happens when market interest rates are higher than the bond's coupon rate. The bond's price is reduced to make it an appealing investment compared to newer bonds with higher rates.
Step-by-step explanation:
If the current price of a bond is less than its face value, it can be inferred that the bond is trading at a discount. This situation usually arises when the market interest rates exceed the coupon rate of the bond, making new bonds that are issued at the higher current interest rates more attractive to investors. Due to this, the seller of the existing bond, with its lower interest payments, needs to reduce the price to make it competitive in the market.
A bond trading at a discount indicates that it is being sold for less than its face value. A bond trades at par when its price equals the face value, and it trades at a premium when the price is above the face value. The bond is not trading when there is no active market transaction for it.
Using the information provided, with interest rates increasing to 12% and the bond's maturity nearing, the present value of this bond decreases below its face value to attract buyers, hence the bond trades at a discount.