When the market interest rate is above the coupon rate for a particular bond, will the bond trade at par value, below par value or above par value.

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justaguide | College Teacher | (Level 2) Distinguished Educator

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A bond is a financial instrument that can be bought as an investment. The main characteristics of a bond are the coupon rate, the par value and the tenure. Irrespective of the price at which the bond is bought, the buyer receives a constant amount at regular intervals of time for the tenure of the bond that depends on the coupon rate. When the bond matures, the buyer receives the par or face value of the bond.

If the coupon rate of the bond is less than the prevailing interest rate, buying the bond at its par value is not an appropriate decision for buyers as they have other alternatives that offer a higher rate of return. As a result, the market price at which the bond is traded is lower than its par value.

An illustration of this is zero-coupon bonds that include U.S. Treasury bills. There are no coupon payments in the case of these bonds. The reason why these are bought by investors is that they are sold at a discount to the par value. The amount received by the buyer when the bond matures is more than what is paid when the bond is bought; this provides the required rate of return.

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