A company plans to issue bonds with a coupon rate of 10%. At what market rates w

Question

A company plans to issue bonds with a coupon rate of 10%. At what market rates will the bonds be issued at a discount? At what market rates will they be issued at a premium?

A.

If market rates are above 10%, there will be a premium. If they are below 10%, there will be a discount.

B.

If market rates are above the price of similar bonds, there will be a discount. If they are prices below similar bonds, there will be a premium.

C.

If market rates are above book value, there will be a premium. If they are below below book value, there will be a discount.

D.

If market rates are above 10%, there will be a discount. If they are below 10%, there will be a premium.

Explanation / Answer

Ans:D. If market rates are above 10% , there will be a discount. if they are below 10%, there will be a premium

Reason: If market rates are above the coupon rate, investor will be offer lower price for the bond. Similarly, if market rate are below coupon rate, investor will be ready to pay high price for the bond as they want high yield on their investment.

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