A bond issue with a face amount of $500,000 bears interest at the rate of 7%....

A bond issue with a face amount of $500,000 bears interest at the rate of 7%. The current market rate of interest is 6%. These bonds will sell at a price that is:

A. More than $500,000

B. Equal to $500,000

C. Less than $500,000

D. The answer cannot be determined from the information provided

Expert Solution

The right answer choice is (A). More than $500,000”

· If the annual coupon interest rate of a bond is higher than current market interest rate, then the bond will be selling at a PREMIUM.

· When pricing bonds, there is an inverse relationship between the Market price and market interest rate or Yield to Maturity of the Bond

· The Market Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

· If the Market Interest Rate Increases, then the discounting rate will be higher & the discounting factor will be lower and it will result’s in the Market Price of the Bond to be lower.

· If the Market Interest Rate Decreases, then the discounting rate will be lower & the discounting factor will be higher and it will result’s in the Market Price of the Bond to be higher.

Here, the annual coupon interest rate of a bond (7.00%) is higher than current market interest rate (6.00%), therefore, the Bond is selling at More than $500,000.

ekkarill92 answered 1 year ago

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A bond issue with a face amount of $500,000 bears interest at the rate of 7%....

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