Multiple choice

When interest rates for similar maturities' bonds are 11%, bond with a 9% coupon rate will sell

  1. above par

  2. below par

  3. at par

  4. at a price unrelated to the interest rates for similar securities
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

When market interest rates rise above a bond's coupon rate, the bond must sell at a discount (below par value) to remain competitive. Investors will only buy it at a lower price so that the yield to maturity matches the market rate of 11%. Conversely, when rates fall below the coupon, bonds sell above par.

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