Final answer:
True, every bond has a par value that is paid on maturity, commonly set at $1,000, and bond prices are indeed quoted as a percentage of this par value. Bond prices adjust in response to changes in market interest rates and risk levels, with the bond's present value reflecting its appeal to investors compared to current market options.
Step-by-step explanation:
When considering the valuation of bonds, it's important to understand that each bond has a face value, often set at $1,000, which is the amount that will be paid to the bondholder upon maturity. The statement that every bond has a par value which will be paid upon maturity and that market convention is a par value of $1,000, with prices quoted as a percentage of par value, is true.
In practice, the price of a bond fluctuates in the market based on changes in interest rates and the perceived risk of the bond. If the market interest rates increase, as in the example where rates rise to 12%, the price of a bond yielding 8% will decrease to make it an attractive investment relative to new bonds with higher interest rates.
The present value of a bond is influenced by the market interest rates compared to the bond’s coupon rate. If an investor can find a different bond with a higher rate, like 12%, the seller of the 8% bond must decrease their bond's price to make it appealing. This results in the bond selling for less than its face value.