Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

11. Long Term Liabilities

Discount on Bonds

Financial Accounting

11. Long Term Liabilities

Discount on Bonds

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Multiple Choice

A bond sells at a discount when the:

bond is issued at its face value

market interest rate is higher than the bond's stated interest rate

market interest rate is lower than the bond's stated interest rate

bond's stated interest rate equals the market interest rate

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Verified step by step guidance

Understand the concept of bond pricing: A bond's price is determined by comparing its stated (coupon) interest rate to the market interest rate. The stated interest rate is the rate printed on the bond, while the market interest rate reflects the current rate investors demand for similar bonds.

Recognize the relationship between bond prices and market interest rates: When the market interest rate is higher than the bond's stated interest rate, the bond becomes less attractive to investors because it offers a lower return compared to the market. As a result, the bond will sell at a discount (below its face value).

Analyze the given options: Eliminate options that do not align with the relationship between market interest rates and bond pricing. For example, a bond issued at its face value or when the stated interest rate equals the market interest rate would not sell at a discount.

Focus on the correct condition: A bond sells at a discount specifically when the market interest rate is higher than the bond's stated interest rate. This is because investors demand a lower price to compensate for the lower return offered by the bond.

Conclude the reasoning: The correct answer is that a bond sells at a discount when the market interest rate is higher than the bond's stated interest rate. This ensures the bond's yield aligns with the prevailing market conditions.