Asked by Patrick Allison on Jun 30, 2024
Verified
If the market interest rate is 4.5%, a $100,000, 5.6%, 10-year bond that pays interest semi-annually would sell at an amount
A) less than face value.
B) equal to the face value.
C) greater than face value.
D) that cannot be determined.
Market Interest Rate
The prevailing rate at which interest is charged on loans and bonds in the broader financial market.
Bond Yield
The return an investor realizes on a bond, calculated by the coupon payments relative to the market price of the bond.
Face Value
The nominal or dollar value stated on a financial instrument, such as a bond or stock, representing its worth at issuance or maturity.
- Identify the processes and explanations for determining the value of bonds within the marketplace, including the role of interest rates in bond valuation.
Verified Answer
ZK
Zybrea KnightJul 05, 2024
Final Answer :
C
Explanation :
When the coupon rate (5.6%) of a bond is higher than the market interest rate (4.5%), the bond sells at a premium, meaning it sells for more than its face value. This is because the bond's payments are more attractive compared to the current market rates, making investors willing to pay more for the bond.
Learning Objectives
- Identify the processes and explanations for determining the value of bonds within the marketplace, including the role of interest rates in bond valuation.