Question

Alexi Co. issued $4.00 million face amount of 7%, 10-year bonds on June 1, 2019. The bonds pay interest on an annual basis on May 31 each year.

Required:
a. Assume that the market interest rates were slightly higher than 7% when the bonds were sold. Would the proceeds from the bond issue have been more than, less than, or equal to the face amount?

Multiple Choice

• The bonds will sell for less than their face amount.

• The bonds will sell for more than their face amount.

• The bonds will sell for equal to their face amount.

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Jessie Co. issued $9 million face amount of 13.2%, 30-year bonds on April 1, 2019. The bonds pay interest on an annual basis on March 31 each year.

Required:
a. Assume that market interest rates were slightly lower than 13.2% when the bonds were sold. Would the proceeds from the bond issue have been more than, less than, or equal to the face amount?

Multiple Choice

• The bonds will sell for more than their face amount.

• The bonds will sell for less than their face amount.

• The bonds will sell for equal to their face amount.

Answer 1

Answer

• With respect to Bonds, there are two rates to be concerned:
  >Coupon rate, at which the bonds is issued and bond holder receive the interest.
  >market rate that is prevailing at the time of issue.
• Concept:
  >If coupon rate provided is LESS than the market rate, the issuer, in order to attract the investors to invest in his bonds, will issue them at a DISCOUNT.

>Similarly, when coupon rate is MORE than market rate, the issuer charges certain PREMIUM when issuing the bonds.

>Bonds issued at discount have issue price lower than face value.
>Bonds issued at premium have issue price higher than face value.

• Based on above notes and concept:
  Answer #1: For Alexi Co.
  >Coupon rate 7% is LOWER than market rate
  >Bonds to be issued at a DISCOUNT.
  .Correct Answer = Option #1: Bonds will sell for less than their face amount.

Answer #2: For Jessie Co.
>Coupon rate 13.2% is HIGHER than market rate
>Bonds will be issued at a premium.
Correct Answer = Option #1: The bonds will see for more than their face value.