Question

A $501,000 bond issue sold for $488,000. Therefore, the bonds:

A $501,000 bond issue sold for $488,000. Therefore, the bonds:

Homework Answers

Answer #1

A $501,000 bond issue sold for $488,000. Therefore, the bond

Is issued at discount.

The Interest rate of market must be more than interest rate of bond or Coupon rate.

The issue of price of bond is lower than face value only when market rate of interest on similar bond is higher than coupon rate of bond.

When market rate I higher then buyers are willing to pay ;lesser than what the price of bond is due to losing of opportunity cost. If an investor can buy similar bond at higher interest rate then why would he loose that income and buy a lower rate bond. This decrease in interest is compensated by discount on bond.

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