Question

Why does a bond sell at a discount when the coupon rate is lower than the required rate of return?

Answer 1

The Bond Value is the Present value of all the cash flows that the bond is going to generate over the period of it's amturity. To arrive at present value, we discount the cash flows and that rate used is the required rate of return, So, If the required rate of return is greater than the coupon rate then it will lead to greater discounting leading to the value of the bond less than the face value. And, when the bond value is less than the face value it is termed as bond is trading at discount.