Asked by Anny karoline souza lucena on May 25, 2024
Verified
If a company sells its bonds at face value, the effective interest rate is
A) lower than the contract interest rate
B) higher than the contract interest rate
C) equal to the contract interest rate
D) higher than the market interest rate
Effective Interest Rate
The actual return on an investment or cost of a loan considering the effect of compounding interest, distinct from the nominal rate.
Contract Interest Rate
The interest rate specified in a loan or bond agreement, which determines the amount of interest the borrower will pay over the term of the loan.
Face Value
The nominal or dollar value printed on a financial instrument, such as a bond or stock certificate, representing its legal value.
- Acquire knowledge on the relationship between bond pricing and face value, and its consequences on effective interest rates.
Verified Answer
SS
Sarah SpencerMay 30, 2024
Final Answer :
C
Explanation :
If a company sells its bonds at face value, meaning they sell the bonds for the exact amount stated on the bond, then the effective interest rate will be equal to the contract interest rate. This is because there is no discount or premium involved in the sale of the bonds.
Learning Objectives
- Acquire knowledge on the relationship between bond pricing and face value, and its consequences on effective interest rates.