Suppose that a bond is issued at its par value or face value. If market interest rates rise after the issue, the price of the bond will likely:
A) rise significantly above its par value.
B) rise slightly above its par value.
C) remain equal to its par value.
D) fall below its par value.

Question

Quizplus · Accepted Answer

When market interest rates rise after the issuance of a bond, the bond's yield becomes less attractive compared to newer bonds with higher yields. Therefore, investors will demand a higher return on the original bond, causing its price to fall below its par value.

Suppose That a Bond Is Issued at Its Par Value