23. If bonds are issued at a premium, the stated interest rateis A) higher than

Question

23.

If bonds are issued at a premium, the stated interest rateis

A)

higher than the market rate of interest.

B)

lower than the market rate of interest.

C)

too low to attract investors.

D)

adjusted to a higher rate of interest.

24.

$5 million, 8%, 10-year bonds are to be issued at a 6% marketrate. Interest will be paid semiannually. When calculating themarket price of the bond, the rate to be used to calculate thepresent value of the face amount and the present value of theperiodic interest payments is

A)

4%.

B)

3%.

C)

8%.

D)

6%.

23.

If bonds are issued at a premium, the stated interest rateis

A)

higher than the market rate of interest.

B)

lower than the market rate of interest.

C)

too low to attract investors.

D)

adjusted to a higher rate of interest.

Explanation / Answer

1) Bonds can be sold at a premium because they are worth more thanface. This occurs when you receive greater payments than themarket would return. These greater payments are a result ofthe interest rate on the bond being greater than the marketrate. Therefore, your answer is A. 2) This question is a bit ambiguous. You will certainly usethe market rate, 6%, to discount the cash flows. However,since this is an annualized rate and we have a semiannual bond, wewill discount by 3% every period (6 months). The 8% (or 4%per period) is only used to calculate the interest payments'nominal value.

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