If bonds are sold at 99, then they are sold at a a. Par b. Face value c. Premium d. Discount
The correct answer and explanation is:
The correct answer is d. Discount.
Here’s the explanation:
Bond prices are typically quoted as a percentage of their face value, also known as par value. The face value is the principal amount of the bond, usually $1,000, which the bondholder will receive when the bond matures.
- Selling a bond at par means selling it at 100% of its face value. If the face value is $1,000, selling at par means selling it for $1,000 (100).
- Selling a bond at a premium means selling it for a price higher than its face value (more than 100%). For example, selling a $1,000 face value bond at 105 means selling it for $1,050.
- Selling a bond at a discount means selling it for a price lower than its face value (less than 100%).
When a bond is sold at “99,” it means the selling price is 99% of its face value. If the bond’s face value is $1,000, selling it at 99 means the price is 0.99 * $1,000 = $990.
Since $990 is less than the $1,000 face value, the bond is being sold at a price below its principal amount. This situation, where the selling price is less than the face value, is defined as selling at a discount. Bonds are often sold at a discount when the prevailing market interest rates are higher than the interest rate (coupon rate) the bond pays, making its fixed payments less attractive compared to new bonds being issued.