Question

A bond issue with a face amount of $400,000 bears interest at the rate of 7%. The current market rate of interest is 9%. These bonds will sell at a price that is:________.

A) More than $400,000.
B) Equal to $400,000.
C) Less than $400,000.
D) The answer cannot be determined from the information provided.

Answer 1

C) Less than $400,000

Step-by-step explanation:

The bond will sell at a discount.

When the market interest rate is higher than a bond's stated interest rate, the bond will be sold at a price lower than face value, or it will sell at a discount.

Inversely, if the bond's interest rate is higher than the market interest rate, the bond will sell at a higher price than face value, or at a premium.