Wow! That was an interesting way of explaining how an issuer decides the coupon rate of a bond. It is true that the law of supply and demand is at work here. The issuer must first consider what the market will bear. If investors are only willing to buy bonds that have a coupon rate of 8% then the issuer of the bonds would not be able to set the rate of their bonds at 4%, not if they actually wanted to sell their bonds. Keep in mind that there are significant costs involved for corporations to ready bonds for the market. However, it is possible for the coupon rate of a bond to be different than the required market rate. The required rate is the rate that investors are willing to accept. This can occur when bonds are sold later in secondary markets after the required rates have changed. If a bond was issued with an 8% coupon rate but the required rate is 10% then the bond would be sold at a discount. Alternatively, if a bond is has a higher coupon rate then what is found in the market the bond would be sold at a premium.
