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?

Question

04-04-2021
Business

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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?

Sagot :

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Parrain Parrain · Answer 1 · 2021-04-09T22:47:39-04:00

Answer: Less than $5,000

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.

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?

Sagot :

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