When a corporation issues 9% AAA rated debentures at par, what will happen when similar AAA issues begin to be offered at 9.5%?

When a corporation issues 9% AAA rated debentures at par, these bonds pay investors a fixed interest rate of 9%. If new AAA rated bonds are subsequently issued offering a higher interest rate of 9.5%, they become more attractive to investors because they provide a greater return on investment.

The original 9% bonds will lose value in the market since they offer a lower yield compared to the new issues. In order for the price of the existing 9% bonds to adjust to the new interest rate environment, their market price must decrease so that their yield becomes competitive with the new bonds. This adjustment is necessary to entice potential buyers; as the price of the bond falls, its yield rises (since yield is inversely related to price). Therefore, the price of the 9% bond will fall below par to align with the available options that offer a higher yield, reflecting the market’s demand for the higher interest that comes with the new 9.5% bonds.