When a bond's issue price is greater than its face value, the actual rate of interest that must be paid is called the
A) effective interest rate.
B) stated interest rate.
C) coupon interest rate.
D) prime interest rate.

Question

Quizplus · Accepted Answer

The effective interest rate takes into account the bond's issue price, face value, and coupon interest rate to determine the actual rate of return for the investor. This rate accounts for any premium or discount paid for the bond and provides a more accurate measure of the bond's yield. The stated interest rate is simply the percentage rate stated on the bond's face and coupon payments. Coupon interest rate is the annual interest rate that the bond pays to the bondholder. The prime interest rate is the rate that commercial banks charge their most creditworthy customers.

When a Bond's Issue Price Is Greater Than Its Face