A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT? (Points: 4)

The bond is currently selling at a price below its par value.
If market interest rates decline, the price of the bond will also decline.
If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.
If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today.
The bond should currently be selling at its par value.

To determine the correct statement, let's analyze each option:

1. The bond is currently selling at a price below its par value.
To assess this, we need to compare the bond's yield to maturity with its coupon rate. If the yield to maturity is higher than the coupon rate, it indicates that the bond is selling at a discount (below par value). In this case, the yield to maturity is 7%, which is lower than the coupon rate of 9%, suggesting that the bond is selling at a premium rather than a discount. Therefore, this statement is not correct.

2. If market interest rates decline, the price of the bond will also decline.
This statement is not accurate. When interest rates decline, the price of existing bonds usually increases, as they offer higher interest rates than new bonds issued at the lower market rate. Therefore, this statement is not correct.

3. If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.
This statement is true. As time passes, the present value of the bond's future cash flows decreases due to the fixed coupon rate. When the bond's price decreases, its yield to maturity increases, reflecting the same coupon payment relative to the lower price. Therefore, if market interest rates remain the same, the bond's price will be lower in one year.

4. If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today.
This statement contradicts the previous statement and is incorrect. As stated previously, if interest rates remain unchanged, the bond's price will be lower in one year.

5. The bond should currently be selling at its par value.
The bond's price will be equal to its par value only if the yield to maturity is equivalent to the coupon rate. However, in this case, the yield to maturity is 7%, while the coupon rate is 9%. This discrepancy suggests that the bond is selling at a premium. Therefore, this statement is not correct.

Based on the analysis, statement 3 is correct: If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.