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      Question

      A bond issued by a public sector company offers a coupon

      rate of 7.5% and is rated AAA by CRISIL. However, due to rising interest rates, the bond is now trading below face value. What is the most likely reason?
      A Downgrade in credit rating Correct Answer Incorrect Answer
      B Bond defaulted on interest payment Correct Answer Incorrect Answer
      C Market interest rates have increased Correct Answer Incorrect Answer
      D Bond has converted to equity Correct Answer Incorrect Answer
      E Maturity date extended Correct Answer Incorrect Answer

      Solution

      When interest rates rise, new bonds offer higher returns, making existing bonds less attractive. Therefore, older bonds with lower coupons trade at a discount even if credit rating is AAA.

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