Multiple Choice
A bond that matures in installments at regular intervals is a:
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11. Long Term Liabilities
Introduction to Bonds and Bond Characteristics
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A bond sells at a discount when the:
A
market interest rate is lower than the bond's stated (coupon) rate
B
bond is callable by the issuer
C
bond's stated (coupon) rate equals the market interest rate
D
market interest rate is higher than the bond's stated (coupon) rate
Verified step by step guidance1
Understand the concept of bond pricing: Bonds are priced based on the relationship between the bond's stated (coupon) rate and the prevailing market interest rate.
Recognize that a bond sells at a discount when its stated (coupon) rate is lower than the market interest rate. This is because investors demand a higher return to match the market rate, which reduces the bond's price.
Analyze the options provided in the problem: The bond sells at a discount when the market interest rate is higher than the bond's stated (coupon) rate. This aligns with the principle that investors will pay less for a bond offering a lower return than the market rate.
Eliminate incorrect options: The bond does not sell at a discount when the market interest rate is lower than the bond's stated rate, nor when the bond is callable by the issuer, nor when the stated rate equals the market rate.
Conclude that the correct answer is: A bond sells at a discount when the market interest rate is higher than the bond's stated (coupon) rate.
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