Multiple Choice
Which one of the following statements concerning bond ratings is correct?
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11. Long Term Liabilities
Introduction to Bonds and Bond Characteristics
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Which of the following is a factor that determines the coupon rate of a company's bonds?
A
Prevailing market interest rates at the time of issuance
B
The number of shares outstanding
C
The par value of the company's common stock
D
The company's annual sales revenue
Verified step by step guidance1
Understand the concept of a bond's coupon rate: The coupon rate is the annual interest rate paid by the bond issuer to the bondholder, expressed as a percentage of the bond's face value.
Recognize the primary factor influencing the coupon rate: The prevailing market interest rates at the time of issuance are a key determinant. Companies set the coupon rate to align with market conditions to make their bonds attractive to investors.
Eliminate irrelevant options: The number of shares outstanding, the par value of common stock, and the company's annual sales revenue are not directly related to the determination of the coupon rate for bonds.
Relate the coupon rate to market interest rates: If market interest rates are high, the company may need to offer a higher coupon rate to attract investors. Conversely, if market interest rates are low, the coupon rate can be set lower.
Conclude that the prevailing market interest rates at the time of issuance are the correct factor influencing the coupon rate of a company's bonds.
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