Final answer:
A bond with a par value under $1,000 sold less than its par value is known as a discounted bond. Bond prices inversely relate to interest rates, which in turn influence whether bonds are sold at a discount or premium. Present Discounted Value (PDV) is a vital concept in understanding bond valuations in relation to their future payments.
Step-by-step explanation:
A bond resulting from a corporate action distribution with a par value of less than $1,000 is typically referred to as a discounted bond. This term generally applies to bonds sold for less than their face or par value. Bonds can be issued at a discount due to various reasons, such as changes in the interest rates or perceived increases in risk. For example, if interest rates rise after a bond is issued, new bonds paying higher coupons become more attractive, causing the value of existing bonds with lower interest rates to decrease, and they may then be sold at a discount. On the flip side, if the rates fall, the value of these bonds may increase because they pay a relatively higher interest rate, and they could be traded at a premium.
The relationship between bond prices and interest rates is inverse; as one goes up, the other tends to go down. The Present Discounted Value (PDV) is a financial concept that measures what future payments are worth in current dollars, factoring in the time value of money with an appropriate discount rate. This concept is fundamental in understanding the valuation of bonds, as the future cash flows of the bond (coupon payments and the return of principal at maturity) are discounted to determine their present value. Since the payments promised by the issuer are fixed, any changes in the market interest rates will affect the PDV and hence the selling price of the bond.