Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten yearsfrom 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

Business

Eduardo Crosby

3 May, 11:27

Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten yearsfrom 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.

+2

Answers (1)

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Keshawn Rowe · Answer 1

B. the nominal rate of interest exceeded the market rate.

Explanation:

Doing a simplification for didactic reasons:

we could say that coupon payment / price = yield

The coupon payment will change between the bonds and the risk on each bond will also be different. all this will also influence on the price. Thus, the yield of bonds with the same ammount of coupon payment will be different as the price is different.

People will pay more in one bond than in other as they were issued at a higher coupon rate in relationship with another similar risk bonds.

So, given the ranking of the company's bond the investor will decide the desired yield and will accept the bond at that price.