CFA Level I · CFA Level I Exam · Fixed-Income Instrument Features
An investor holds a bond with a coupon rate of 5% that is currently trading at a market discount rate (yield) of 7% for similar-risk bonds. The bond's price relative to par is most likely:
The bond most likely trades below par. Its 5% coupon is less than the 7% yield investors require, so its fixed cash flows are discounted at a rate higher than the coupon, pushing the price under face value.
- Aabove par value
- Bequal to par value
- Cbelow par valueCorrect
Explanation
When the required yield exceeds the coupon rate, the bond's fixed cash flows are discounted at a higher rate than the coupon, so the price is below par. The price equals par only when coupon rate equals yield. A price above par requires a yield below the coupon rate.
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