Question

Consider a bond with a nominal yield of 2.5% If market interest rates are 4% in the economy, the BOND PRICE will be expected to sell at O a premium O a discount the same as face value

Answer 1

If market interest rates are 4% in the economy and a bond has a nominal yield of 2.5%, the bond price will be expected to sell at a discount. When market interest rates are higher than the bond's nominal yield, investors will demand a lower price for the bond to compensate for the lower return compared to alternative investments. Therefore, the bond price is expected to be below its face value, resulting in a discount.