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16 May, 20:27

A bond issue with a face amount of $496,000 bears interest at the rate of 10%. The current market rate of interest is also 11%. These bonds will sell at a price that is:

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  1. 16 May, 23:21
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    Answer: Less than $496000.

    Explanation:

    This is the case where market rate of interest is greater than the coupon rate.

    current market rate of interest = 11%

    face amount = $496000

    bears interest at the rate of 10%

    In this case, buyer will purchase these bond below the face value and hence bonds are issued at a discount. So, the price of these bonds are less than the face value.

    This is due to the higher market interest rate because if a buyer can get higher return from market, so why would he buy these bonds.

    ∴ These bonds will sell at a price that is less than $496000.
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