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2) If a firm issues bonds with a contractual interest rate that is higher than the market interest rate, the bond is issued a

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If the contractual interest rate is higher than the market interest rate, the bond is sold at premium since higher contractual interest rate increases the value of the bond. In other words, it offsets the difference in the interest rates.

The cost of borrowing is decreased when the bonds are issued at premium, since a part of the interest expense can be met by the premium amount collected at issue time, amortised over the life of the bond

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