Question

If the market rate of interest is 8%, a $50,000, 7%, 20-year bond that pays interest semiannually would sell at an amount

a. less than face value

b. equal to the face value

c. greater than face value

d. that cannot be determined

Answer 1

a. less than face value

Step-by-step explanation:

In this issue, we will equate the interest rate on the market with the interest rate on the bond.

As we see, the market interest rate, i.e. 8%, is higher than the bond interest rate, i.e. 8%, than the bond is sold at discount, and if the market interest rate is lower than the bond interest rate than the bond is sold at a premium.