C. Explain why the company was able to issue the bonds for only $9,738,256 rather than for the face amount of $11,000,000. The bonds sell for less than their face amount because the market rate of interest is greater than the contract rate of interest. Investors Are not willing to pay the full face amount for bonds that pay a lower contract rate of interest than the rate they could earn on similar bonds (market rate).

Question

Marie Ali

Business

14 June, 03:47

C. Explain why the company was able to issue the bonds for only $9,738,256 rather than for the face amount of $11,000,000. The bonds sell for less than their face amount because the market rate of interest is greater than the contract rate of interest. Investors Are not willing to pay the full face amount for bonds that pay a lower contract rate of interest than the rate they could earn on similar bonds (market rate).

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Derick Hughes · Answer 1

The bonds sell for less than their face amount because the market rate of interest is greater than the contract rate of interest. Investors Are not willing to pay the full face amount for bonds that pay a lower contract rate of interest than the rate they could earn on similar bonds (market rate).

Explanation:

When the required rate of return of investors is higher than the coupon rate of the bond, It means the investors have option in the market which offer more rate of return than the coupon rate offered by the bond, So the value of the bond falls which ultimately compensate the difference of investors required rate of return and Coupon rate.