Question

If the par value of 15-year bond is $5,000 with coupon rate $5% but the market rate/discount rate is 5.5%, the value of the bond is more or less than $5,000? Why?

Answer 1

Answer: Less than $5,000

Step-by-step explanation:

The Bond described above is a discount bond. Discount bonds are bonds that sell below their par value because the market rate for the bond is higher than the coupon rate.

This happens when investors believe a bond to be riskier than the company says and so attach a higher return to it than its coupon rate. As a result, the price of the bond will be less than the par value because the higher market rate will discount the bond cashflows more than the coupon rate would.