Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that
A) the effective yield or market rate of interest exceeded the stated (nominal) rate.
B) the nominal rate of interest exceeded the market rate.
C) the market and nominal rates coincided.
D) no necessary relationship exists between the two rates.

Question

Quizplus · Accepted Answer

The issuance of bonds at a premium occurs when the nominal (or coupon) interest rate on the bonds is higher than the prevailing market interest rate. This makes the bonds more attractive to investors, who are willing to pay more than the face value for the higher interest income.