When the prevailing market interest rate dips below the bond's coupon rate, the instrument trades__________?
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Answer: B. Above its par value
Explanation
When market interest rates drop below the coupon rate, bonds trade above par. Investors pay a premium because the bond offers an attractive coupon yield. Higher coupon payments make the fixed income security desirable to buyers. Bond prices and market interest rates move in opposite directions always. Par value represents the face value paid back at bond maturity. Bond yields adjust in the secondary market to match prevailing economic rates.
Institutional investors analyze yield environments to price fixed income portfolios. Existing bondholders experience capital gains when market interest rates decline. Issuers may consider call provisions when prevailing rates drop significantly. Trading below par value happens when market rates exceed coupon rates. Equal to return rate describes par trading conditions under matching yields. Seasoned price refers to previously issued securities rather than a valuation.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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