CS Executive · Corporate Accounting and Financial Management · Security Analysis
A bond with face value ₹1,000 and 12% annual coupon trades at ₹1,000 when the required return is 12%. Which statement is correct if the required return falls to 10%?
The bond trades at a premium to face value. Its coupon of 12% is fixed and now exceeds the 10% required return, so the present value of its coupons and principal discounted at 10% is more than ₹1,000.
- AThe bond trades at a discount to face value
- BThe bond continues to trade at par
- CThe bond trades at a premium to face valueCorrect
- DThe bond's coupon falls to 10%
Explanation
The coupon of ₹120 is fixed. With the required return below the coupon rate, the present value of cash flows exceeds face value, so the bond trades at a premium. It does not remain at par, and the coupon does not change.
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