Question

A bond issue with a face amount of $496,000 bears interest at the rate of 10%. The current market rate of interest is also 11%. These bonds will sell at a price that is:

Answer 1

Answer: Less than $496000.

Explanation:

This is the case where market rate of interest is greater than the coupon rate.

current market rate of interest = 11%

face amount = $496000

bears interest at the rate of 10%

In this case, buyer will purchase these bond below the face value and hence bonds are issued at a discount. So, the price of these bonds are less than the face value.

This is due to the higher market interest rate because if a buyer can get higher return from market, so why would he buy these bonds.

∴ These bonds will sell at a price that is less than $496000.