Asked by Bethany Cheek on May 16, 2024
Verified
When the market rate of interest is equal to the contract rate of interest, the bonds should sell at
A) a premium
B) par
C) an inflation-adjusted discount
D) a discount
Market Rate
The prevailing interest rate available in the marketplace for loans, deposits, and investments, often influenced by central bank rates and economic conditions.
Contract Rate
The agreed upon rate of interest to be paid on a loan or financial transaction as outlined in a contract.
Premium
The amount by which the cost of a financial instrument or insurance policy exceeds its face value or principal.
- Attain an understanding of the bond valuation in reference to its face value and the resultant impact on effective interest yields.
- Identify differences among market rate, contractual rate, and additional rates relevant to bonds.
Verified Answer
RP
Raahim PathanMay 21, 2024
Final Answer :
B
Explanation :
When the market rate of interest is equal to the contract rate of interest, the bond should sell at par (face value) because investors will be indifferent between buying the bond at par or investing their money elsewhere at the same rate of return. Therefore, there is no need for the bond to sell at a premium or a discount. An inflation-adjusted discount may occur if the bond's contract rate of interest is not adjusted for inflation and inflation has reduced the bond's purchasing power. A discount may occur if the contract rate of interest is lower than the market rate of interest, making the bond less attractive to investors.
Learning Objectives
- Attain an understanding of the bond valuation in reference to its face value and the resultant impact on effective interest yields.
- Identify differences among market rate, contractual rate, and additional rates relevant to bonds.