IBM is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15,2012.Interest rates rise in the economy so that similar financial investments pay 9%.IBM will:
A)not be able to issue the bonds because no one will buy them.
B)receive a higher issue price to compensate buyers for the lower stated interest rate.
C)have to accept a lower issue price to attract buyers.
D)have to reprint the bond certificates to change the stated interest rate to 9%.

Question

Quizplus · Accepted Answer

When interest rates rise, investors demand higher rates of return on their investments. In order to attract buyers in this environment, IBM will have to offer a higher yield on its bonds. This means that the issue price of the bonds will have to be lower than initially planned in order to compensate for the lower stated interest rate. Therefore, the correct choice is C, which states that IBM will have to accept a lower issue price to attract buyers.

IBM Is Planning to Issue $1,000 Bonds with a Stated