Multiple Choice
In 2014, ABC Company issued \$100,000, 10%, bonds while the market interest rate was 12%. The bonds mature in the current year. The amount of principal that ABC Company will repay in the current year is equal to:
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11. Long Term Liabilities
Discount on Bonds
Multiple Choice
Which of the following statements is true of a bond that is issued at a discount?
A
The bond's stated interest rate is higher than the market interest rate at the time of issuance.
B
The bond will not require any interest payments to bondholders.
C
The bond's stated interest rate is lower than the market interest rate at the time of issuance.
D
The bond will be sold at an amount greater than its face value.
Verified step by step guidance1
Step 1: Understand the concept of a bond issued at a discount. A bond is issued at a discount when its selling price is less than its face value. This typically happens when the bond's stated interest rate (coupon rate) is lower than the prevailing market interest rate.
Step 2: Analyze the relationship between the stated interest rate and the market interest rate. If the stated interest rate is lower than the market interest rate, investors will demand a discount to compensate for the lower return compared to other investments available in the market.
Step 3: Evaluate the incorrect options. For example, the statement 'The bond's stated interest rate is higher than the market interest rate at the time of issuance' is false because a bond issued at a discount occurs when the stated interest rate is lower, not higher.
Step 4: Address the statement 'The bond will not require any interest payments to bondholders.' This is incorrect because bonds, regardless of being issued at a discount, still require periodic interest payments based on the stated interest rate.
Step 5: Confirm the correct statement. The correct answer is 'The bond's stated interest rate is lower than the market interest rate at the time of issuance,' as this explains why the bond is sold at a discount.
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