Question

Bond prices depend on the market rate of interest, stated rate of interest, and time. Determine whether the following bonds payable will be issued at face value, at a premium, or at a discount:

a. The market interest rate is 8%. Denton issues bonds payable with a stated rate of 7.75%.
b. Starkville issued 8% bonds payable when the market interest rate was 8.25%.
c. Houston issued 6% bonds when the market interest rate was 10%.
d. Federal issued bonds payable that pay the stated interest rate of 8.5%. At issuance, the market interest rate was 10.25%.

Answer 1

First of all we have to understand the relationship between Interest rates and the Bonds price:
1.When the coupon rate is more than the market intterest rate then the Bond will be issued at premium
It is because of the fact that since the coupon rate is more then the interest will be higher and hence the issue price will be more than the face value.
2.When the coupon rate is less than the market intterest rate then the Bond will be issued at Discount
Similar to the above explanation in this case if the coupon rate is less then interest will be lower and hence the issue price is less than the face value
3.When the coupon rate is equal to the market intterest rate then the Bond will be issued at face value
Now let us put the above explanation in the question given:
a.Since the coupon rate(7.75%) is less than the market intterest rate(8%) hence Bond will be discounted at Discount
b.Since the coupon rate(9%) is more than the market intterest rate(8.25%) hence Bond will be discounted at Premium
c.Since both the coupon rate and market rate are same hence the Bond is issued at par
d.Since the coupon rate(8.5%) is less than the market intterest rate(10.25%) hence Bond will be discounted at Discount