Bonds will sell at a discount under which condition?

Bonds will typically sell at a discount when the coupon interest rate is lower than the prevailing market rate. This situation arises because investors require a return that is commensurate with the risk and the current interest environment. When new bonds are issued at higher coupon rates, existing bonds with lower rates become less attractive.

This discrepancy leads to a decline in the market price of those existing bonds, causing them to sell at a discount relative to their face value. The lower the coupon rate in comparison to the market rate, the greater the discount, as investors will seek to compensate for the lower interest payments by purchasing the bond for less than its par value. This ensures that their effective yield aligns more closely with the higher rates available in the market.

Consequently, the relationship between the coupon interest rate of the bond and the market interest rates plays a crucial role in determining whether the bond sells at a premium, par, or discount.