Question

If a bond sells at a discount and market rates are expected to stay the same until maturity, the price of the bond will: Question 7 options:

increase over time, approaching the par value at maturity

increase over time, approaching the par value minus the final interest payment at maturity

remain constant until maturity

Answer 1

Ans 7: A) increase over time, approaching the par value at maturity

Explanation:

When we purchase a discount bond, the probabilities of increase in the bond value are rationally high, as long as the creditor doesn't default. It means that we will get the par value of the bond even when we have purchased the bond at discount i.e. at lesser price than par or face value. This is applicable when we hold out the discount bond until its maturity.

So, if a bond sells at a discount and market rates are expected to stay the same until maturity, the price of the bond will increase over time, approaching the par value at maturity.

Hence, our answer option is A)

Ans: If a bond sells at a discount and market rates are expected to stay the same until maturity, the price of the bond will: increase over time, approaching the par value at maturity.