Multiple Choice
If the Apple Corporation sells a bond, it is:
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11. Long Term Liabilities
Introduction to Bonds and Bond Characteristics
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A bond's stated interest rate is:
A
The market rate of interest at the time the bond is issued.
B
The rate used to calculate the bond's periodic interest payments to investors.
C
The rate that determines the bond's selling price in the market.
D
The rate at which the bond's principal will be repaid at maturity.
Verified step by step guidance1
Understand the concept of a bond's stated interest rate: The stated interest rate, also known as the coupon rate, is the rate specified on the bond itself. It is used to calculate the periodic interest payments made to bondholders.
Clarify the difference between the stated interest rate and the market interest rate: The market interest rate is the rate of return investors demand based on current market conditions, which influences the bond's selling price.
Recognize that the stated interest rate does not determine the bond's selling price: The bond's selling price is determined by the market rate of interest and the bond's terms, such as maturity and coupon payments.
Note that the stated interest rate is unrelated to the repayment of the bond's principal at maturity: The principal repayment is based on the bond's face value, not the stated interest rate.
Conclude that the correct definition of the stated interest rate is: 'The rate used to calculate the bond's periodic interest payments to investors.'
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