What happens if a company sells bonds when the current market rate is: (a) equal to...

What happens if a company sells bonds when the current market rate is: (a) equal to the company’s bond rate? (b) less than the company’s bond rate? (c) more than the company’s bond rate?

Expert Solution

Solution

(a) equal to the company’s bond rate?

Answer---The bond will sell at Par value of the bond.

This is because the investment in bond is giving same return as the market so it would be indiffrence for investors as to where to invest since return is same. The bond will not fetch high value or be sold at discount in this case.

(b) less than the company’s bond rate?

Answer---The bond will be sold at Premium

This is because the investors will be willing to pay more for the bond since bond is giving high return than the market.

(c) more than the company’s bond rate?

Answer--- The bond will be sold at Discount

The reason is, since the company is giving less return the investors wont be willing to invest in this company's bond so in order to attract investors the bond have to be sold at discount. Basically the price of the bond will be lowered so that investor gets same interest as the market is giving by discounted bond value.

ekkarill92 answered 3 months ago

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