Question

8)A company issues a 5% bond when the market yield rate for an investment of similar risk is 6%. This is an example of a bond issued at

A)the discount rate.

B)a premium.

C)a discount.

D)cannot tell from the information provided.

Answer 1

Correct answer------------(C) A discount.

.

There are three situation at the time of issue of bond

1. A bond is issued at par when market rate and coupon rate are same.

2. The bond is issued at premium when market rate is lower than coupon rate.

3.The bond is issued at discount when market rate is higher than coupon rate.

the third situation applies here.

The bond is issued at discount when market rate is higher than coupon rate because the investor would be more likely invest in market so in order to attract investor companies issue bonds at discount to give investors same return as market.