Question

Over time, a _______ bond will see its price ______ if interest rates do not change.

	A.	par, decrease
	B.	par, increase
	C.	discount, decrease
	D.	premium, increase
	E.	discount, increase

Answer 1

Bond prices and yields move in opposite direction, i.e. if the yields rise the bond prices will move down and if the yields fall the bond prices will move up.

The Par bond is issued at face value and will also give face value at maturity and in between also the price will not change if the interest rates do not change.

Discount bond is issued at below par value and will give par value at maturity, hence the value of the discount bond will increase over time if the interest rates do not change.

Similarly Premium bond is issued at above par value and will give par value at maturity, hence the value of the discount bond will decrease over time if the interest rates do not change.

Hence option (E) is correct