Final answer:
Daniels's bonds, with a stated interest rate of 5% in a market where the interest rate is 7%, will sell at a discount because they offer less return than the prevailing market rate.
Step-by-step explanation:
The student's question about the pricing of Daniels's bonds payable in comparison to the market interest rate involves understanding how bonds are valued in the market.
When a bond's stated interest rate (coupon rate) is lower than the prevailing market interest rate, the bond will sell at a discount. Conversely, if the bond's stated interest rate is higher than the market rate, it will sell at a premium.
Given that Daniels's bonds have a stated interest rate of 5% while the current market rate of interest is 7%, Daniels's bonds will be priced at a discount because they are less attractive to investors as they offer a lower return compared to the current market rate.
To illustrate this with an example, consider a hypothetical two-year bond issued at $3,000 with a coupon rate of 8%. If the discount rate also happens to be 8%, the bond's present value would match its face value.
However, if the market interest rates rise to 11%, thereby increasing the discount rate, the same bond's present value would decrease, indicating it would sell at a discount.