Question

# Which one of the following 15-year bonds with a maturity value of \$3,000,000 would generate the...

Which one of the following 15-year bonds with a maturity value of \$3,000,000 would generate the lowest proceeds upon issuance?

Select one:

A. A bond with a coupon interest rate of 9% and a prevailing market rate of 7%

B. A bond with a coupon interest rate of 8% and a prevailing market rate of 8%

C. A bond with a coupon interest rate of 6% and a prevailing market rate of 6%

D. A bond with a coupon interest rate of 7% and a prevailing market rate of 9%

Ans. is D A bond with a coupon interest rate of 7% and a prevailing market rate of 9%

Explanation: Since Bond proceeds will be higher than face value, if coupon interest rate is more than market interest rate, so option A is not right, secondly, if coupon interest rate and market interest rate is same bond will be issued at par value so under option B and C Proceed will be \$3M and if Coupon interest rate is lower than market rate, bond will be issued at discount, i.e. under option D bond proceeds will be lower than \$3M

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