Question

Which of the following statements is​ FALSE? A. When a bond is trading at a​ discount, the price drop when a coupon is paid will be larger than the price increase between​ coupons, so the​ bond's discount will tend to decline as time passes. B. ​Ultimately, the prices of all bonds approach the​ bond's face value when the bonds mature and their last coupon is paid. C. When a bond trades at a price equal to its face​ value, it is said to trade at par. D. As interest rates and bond yield​ rise, bond prices will fall.

Answer 1

Correct option is (A)

Step-by-step explanation:

A bond can be sold at par, discount or premium. A bond that is sold at discount means selling price is lower than face value or par value of the bond. In this case, price increase between coupons is more than the price drop when coupon is paid. So, bond's price rise over time and discount falls subsequently.

If bonds are sold at premium that is sale value is more than face value of bond, then price drop when coupon is paid is more than increase in price between coupon payments.

So, the statement is incorrect. Statement will be correct in case of bonds trading at premium.