Question

Cabell Corp. bonds pay an annual coupon rate of 10%. If investors' required rate of return is now 12% on these bonds, they will be priced at A. a premium to par value. B. a discount to par value. C. Cannot be determined without knowing the number of years to maturity. D. par value.

Answer 1

B. a discount to par value.

Step-by-step explanation:

As we know that

If Face value > Price of Bond, Then the bond will be priced at discount and Coupon rate < Required rate of return.

If Face value < Price of Bond, Then the bond will be priced at Premium and Coupon rate > Required rate of return.

The price of the bond is determined by calculating the present value of future cash flows associated with the bonds using required rate of return. If the required rate of return is higher than the coupon value the present value of the cash flows will be lower, so ultimately the price of the bond will also be lower from the face value which will be a discounted price.