The bonds of ADL Ltd have a maturity of 10 years and are currently selling at a discount to their face value. If the bond’s market yield rises unexpectedly, what is most likely to happen to the price of the bonds?
A) The bonds will now sell at a smaller discount
B) The bonds will now sell at a larger discount
C) The bonds will now sell at a small premium
D) The bonds will now sell at a large premium
E) One cannot say anything about the price of the bonds without additional information
Correct option is "B"- The bonds will now sell at a larger discount
If currently bond is trading at discount ,it means the bond current market rate (yield to maturity) is higher than coupon rate .
so with further increase in market yield ,The bond now will sell at higher discount then before this is so because we will discount coupons with higher discount market rate resulting in lower value.
The bonds of ADL Ltd have a maturity of 10 years and are currently selling at...
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