When the market rate of interest on the date bonds are issued is higher than the face rate of interest on the bonds:
A)the proceeds from the issuance of the bonds will be greater than the face value of the bonds
B)the bonds are issued at a premium
C)the bonds are issued at a discount
D)both a and c are correct

Question

Quizplus · Accepted Answer

When the market rate of interest is higher than the face rate of interest, the bonds are less desirable to investors since they can earn a higher return elsewhere. As a result, the bond issuer must offer a discount (i.e. sell the bonds for less than their face value) to entice investors to buy the bonds. This results in a lower initial proceeds from the issuance of the bonds compared to the face value. Therefore, option C is the correct answer. Option A is incorrect since the proceeds will be less than the face value, not greater. Option B is incorrect since premium is when the bonds are sold above the face value.

When the Market Rate of Interest on the Date Bonds