Bond Pricing – MCQ

Practice Question

Intro to Financial Accounting
Non-Current Liabilities
Bond Issuance and Valuation
MCQs

A company has an outstanding bond with a coupon rate of 4% and a market rate of 5%. What would you expect to happen to the bond's price in the market?

  1. The bond will be sold at a premium.
  2. The bond will be sold at a discount.
  3. The bond will be sold at face value.
  4. The bond's price will not be affected.
Answer +
Correct Answer: B
Explanation +

When the market rate exceeds the coupon rate, new investors demand a higher return than the bond offers through interest payments. As a result, the bond's price drops below its face value to make it attractive — this is called selling at a discount.

This relationship between market rates and bond prices is critical to understand when investing in or issuing bonds, as it directly influences valuation, yield, and market behavior.