Question

Allure Company planned to raise $100,000 by issuing bonds. The bond certificates were printed bearing a stated (coupon) interest rate of 8% paid annually on December 31, which was equal to the market rate of interest at that time. However, before the bonds could be issued, economic conditions forced the market rate up to 9%. Question:

Which of the following statements is correct regarding the issue price of these bonds?

Select one: a. The bonds would not be sold at all; Allure Company would have the certificates reprinted bearing the market rate of 9%. b. The issue price will be exactly $100,000 because Allure Company would still make cash interest payments at the 8% stated (coupon) rate. c. The issue price will be more than $100,000 because the 8% stated (coupon) rate of interest was less than the market rate. d. The issue price will be less than $100,000 because the 9% market rate of interest was more than the stated (coupon) rate.

Answer 1

The correct anwser is

D) The issue Price will be less than $ 100000 because the 9 % market rate of interest was more than the stated (coupon) rate.

Explanation

Since the market rate of interest is more than the coupon rate , so the buyers of the bond will be willing to pay less than the face value of the bond, so it means the bond will be issued at discount. Since in our case market interest rate is 9 % and coupon rate is 8 %, so it means issue price will be less than face value that is $ 100000.