If a entity sells bonds at a premium: The bonds' contract rate is less than the...
If a entity sells bonds at a premium:
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The bonds' contract rate is less than the market rate at issuance. |
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The bonds' contract rate is the same as the markets at issuance. During the bonds' term, the market rate changes and is becomes lower than the bonds' contract rate. |
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The bonds' contract rate is higher than the market rate at issuance. |
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The bonds' contract rate is the same as the market rate at issuance. |
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The bonds' contract rate is lower than the market rate at issuance and changes during the term of the bond to become higher than the bond's contract rate. |
Homework Answers
Answer
- Correct Answer = Option #3
The Bonds’ contract rate is HIGHER than the market rate at issuance. - This is because if contract rate is HIGHER than market rate, this means that bond holders will receive ‘interest income’ HIGHER than what they would have earned, had they invested in market.
- For paying this HIGHER interest income, the bond issuer charges the PREMIUM and hence the entity sells the bonds at a premium.
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If a entity sells bonds at a premium:
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