If a bond with a face value of $1,000 and a face interest rate of 7 percent is issued for $970,the market interest rate at the date of issuance must have been less than 7 percent.

Question

Quizplus · Accepted Answer

If the bond is issued for less than the face value, it means the effective interest rate is higher than the face interest rate. In this case, since the bond is issued for $970, the effective interest rate is: 
Effective interest rate = ($1,000 - $970)/$970 = 0.0309 or 3.09%
If the market interest rate at the date of issuance was less than 7 percent, then the bond would be issued for more than its face value, not less. Therefore, the market interest rate must have been higher than 7 percent.

If a Bond with a Face Value of $1,000 and a Face