Question

A bond issue with a face amount of $506,000 bears interest at the rate of 10%. The current market rate of interest is also 10%. These bonds will sell at a price that is:

Multiple Choice

• More than $506,000.

• Equal to $506,000.

• Less than $506,000.

• The answer cannot be determined from the information provided.

  A bond issue with a face amount of $507,000 bears interest at the rate of 7%. The current market rate of interest is 8%. These bonds will sell at a price that is:

  Multiple Choice

• The answer cannot be determined from the information provided.

• More than $507,000.

• Less than $507,000.

• Equal to $507,000.

Answer 1

Question 1

Correct answer----------Equal to $506,000.

Question 2

Correct answer----------Less than $507,000.

Explanation

There are three situation with issue of Bonds

1. When Market rate of interest is lower than coupon rate the buyer is ready to pay more than the face value so bonds are issued at premium and price of bond is more than face value.

2.When Market rate of interest is higher than coupon rate the buyer will pay less than the face value so bonds are issued at Discount and price of bond is less than face value. This is because , why would an investor pay more for a bond when he can get more return in market than the bonds issued.

3. When market and bond rate is equal. This makes a indifferent point and the price of bond is equal to face value.