Multiple choice

A bond with a coupon rate of 9% will sell, when current coupons for bonds of similar maturities are 11%, at

  1. a price which is not related to interest rates for similar maturities

  2. above face value

  3. face value

  4. below face value
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

When a bond's fixed coupon rate (9%) is lower than the current market rate for similar bonds (11%), investors will only buy it at a discount. The price must fall below face value so the effective yield matches the market rate. This is the inverse relationship between bond prices and market interest rates.

Keep practicing — related questions