Asked by Darien-Jade Handy on May 02, 2024
Verified
When the market rate of interest is greater than the contract rate of interest, the bonds should sell at
A) a premium
B) par value
C) a discount
D) face value
Market Rate
The prevailing interest rate available in the marketplace on investments or loans, subject to changes based on supply and demand and economic conditions.
Discount
A reduction from the usual cost of something, often used to encourage sales or purchases.
- Gain insight into how bond prices are determined in association with their nominal value and how this affects the effective interest rates.
Verified Answer
ZK
Zybrea KnightMay 07, 2024
Final Answer :
C
Explanation :
When the market rate of interest is greater than the contract rate of interest, it means that investors can earn a higher rate of return by investing in bonds with higher market rates. As a result, they are less likely to be interested in purchasing bonds with a lower contract rate, causing the bonds to sell at a discount (below par value) in order to compensate for the lower return.
Learning Objectives
- Gain insight into how bond prices are determined in association with their nominal value and how this affects the effective interest rates.