313.3
3. If market rates are currently approximately 8% for coupon bonds with $1000 par and 3 years to maturity, would a 3 year, $1000 par bond with 7% coupons be selling at a discount or premium? WHY? (4)
This question comes from the bond topic and previous exams. It would be selling at a discount. It is offering 7% interest while current market conditions demand 8% interest. Thus, if a company wanted to issue a bond at par right now, it would have to offer 8% to get people to pay $1000. Thus, I will not pay $1000 for a bond paying 7% when I can get a bond paying 8% for the same $1000.
Just saying that market rates were higher than the coupon rate is only a partial explanation. You must demonstrate that you understand why the results in a discount.