Asked by Laney Ankney on Apr 24, 2024
Verified
If a company sells its bonds at less than 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 true interest rate when compounding interest is taken into account, differing from nominal rate.
Contract Interest Rate
The rate of interest stipulated within a financial contract, often determining the amount of interest a borrower must pay on a loan.
Face Value
The nominal value or dollar value printed on a security, such as a bond or stock certificate, representing its value at issuance.
- Grasp the dynamics between the pricing of bonds relative to their par value and the influence on the prevailing interest rates.
Verified Answer
CA
Casey Amanda6 days ago
Final Answer :
B
Explanation :
If a company sells its bonds at less than face value, the effective interest rate will be higher than the contract interest rate. This is because the bondholders will receive the face value upon maturity, but they paid a lower amount to purchase the bond initially. This means that the interest payments they receive over the life of the bond will represent a higher percentage return on their investment than the contract interest rate would suggest.
Learning Objectives
- Grasp the dynamics between the pricing of bonds relative to their par value and the influence on the prevailing interest rates.