What can be concluded about Duchess Corporation's bond pricing given current market rates exceed the coupon rate?
Understand the Problem
The question is asking about the implications of the relationship between a bond's coupon rate and the current market rates. Specifically, it seeks to determine how different pricing strategies for the bonds relate to the market conditions, particularly when current rates are higher than the bond's coupon rate.
Answer
The bonds are priced below par value, trading at a discount.
Given that current market rates exceed the coupon rate, Duchess Corporation's bonds are likely to be priced below par value, trading at a discount.
Answer for screen readers
Given that current market rates exceed the coupon rate, Duchess Corporation's bonds are likely to be priced below par value, trading at a discount.
More Information
Bonds with a lower coupon rate than prevailing market rates are less attractive as they offer lower returns compared to newly issued bonds with higher rates, leading to a decrease in their market price.
Tips
A common mistake is to assume that a bond with a lower coupon rate than the market rate means the bond is paying more; actually, it means the bond's price is lower because it offers less return.
Sources
- Bond Coupon Interest Rate: How It Affects Price - Investopedia - investopedia.com
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