A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 8%. These bonds will sell at a price that is: Select one: A. More than $500,000. B. The answer cannot be determined from the information provided. C. Less than $500,000. D. Equal to $500,000.

Question

Arjun

Business

14 July, 08:22

A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 8%. These bonds will sell at a price that is: Select one: A. More than $500,000. B. The answer cannot be determined from the information provided. C. Less than $500,000. D. Equal to $500,000.

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Answers (1)

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Heidi · Answer 1

C. Less than $500,000

Explanation:

The bond has a face value of 500,000 and has a coupon rate of 7% which means it pays payments of 7% yearly, where as the market interest rate for the bond is 8% which means that this bond is paying investors less than what they require from this bond. Because the bond is paying less than it's required return it will sell for less than it's face value which is 500,000. When ever the coupon rate of the bond is less than the market interest rate it sells for a discount from it's face value and whenever the the bond pays from than the market interest rate it sells on a premium.