Question

CSX issued 5-year bonds. If the bonds were issued at a discount, then the A. Nominal...

CSX issued 5-year bonds. If the bonds were issued at a discount, then the


A. Nominal rate < stated rate


B. Effective rate > stated rate


C. Nominal rate > stated rate


D. Effective rate < effective yield

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Homework Answers

Answer #1

Answer is B

Bonds are issued at discount when effective rate is greater than stated rate. Effective rate is the market rate of interest. The stated rate is the coupon rate of interest on face value of bonds. The higher market rate of interest will lead to higher discounting factor and hence present value of bond payable principal and interest payments will be lower than the face value of bonds payable. The difference between face value of bonds payable and issue price of bonds payable is discount on issue of bonds. Hence answer is B.

Nominal rate of interest is not used in Bond calculation hence answer are not A and C. effective rate gives effective yield. Hence answer is not D.

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