With reference to interest rate, when does a bond sell at a discount, at a premium and at its par value.

Expert Answers
justaguide eNotes educator| Certified Educator

A bond is a financial instrument that gives the holder a constant rate of interest. The interest is usually accumulated and given to the bond holder along with the price at which the bond was bought or the par value when the bond expires.

The interest rate offered by a bond is dependent on the prevailing interest rate and the level of uncertainty associated with the ability of the issuer to be able to repay the debt that is being acquired.

Bonds are traded in bond markets with people buying and selling bonds based on their estimation of interest rates in the future. If the interest rate being offered by the bond is higher than the estimated interest rate in the future, buyers are willing to pay a higher price for the bond and the price it trades at is higher than the par value. If interest rates in the future are expected to rise, buyers would buy the bonds at a price below their par value so that their return on investment remains the same. A bond trades at its par value if interest rates are expected to remain the same in the future as they were when the bond was issued.