Final answer:
A bond priced below its par value is called a discount bond. It is sold at a discount when the market interest rates exceed the bond's coupon rate, making it less appealing at its face value. Option A
Step-by-step explanation:
The bond selling for a price lower than its par value is known as a discount bond. A discount bond is priced below its face value because the current interest rate has risen above the bond's coupon rate, making it less attractive to investors unless it's sold for less than its par value.
For example, if a bond has a $1,000 face value and an 8% coupon rate but the prevailing interest rates in the economy rise to 12%, the bond issuer may sell the bond at a discount to attract buyers. Investors would be more inclined to purchase a bond that pays less interest only if they can obtain it for less than its par value, compensating for the lower interest income by a lower purchase price.
A premium bond, on the other hand, sells for more than its par value because its coupon rate is higher than current market rates, making it more attractive. A junk bond is a high-risk bond with a high yield, while a municipal bond is a debt security issued by a state, municipality, or county to finance its capital expenditures and is not necessarily sold at a discount or premium. Option A