Asked by Jeanna Ramig on May 07, 2024
Verified
If the market interest rate is greater than the contractual interest rate bonds will sell at a discount.
Market Interest Rate
The rate of interest prevailing in the market that lenders demand and borrowers pay for funds.
Contractual Interest Rate
The agreed-upon rate of interest that is to be applied to the principal amount in a financial contract.
Discount
A reduction in the price of goods or services, typically offered to encourage purchases.
- Acquire knowledge on the fundamentals of bonds, their features, and the variances between contractual and market interest rates.
- Comprehend the accounting approaches for bonds released at a premium, discount, or nominal value, and the ensuing recognition of interest costs.
Verified Answer
JM
Jessica ModestoMay 10, 2024
Final Answer :
True
Explanation :
When the market interest rate (also known as the yield) is higher than the contractual interest rate (also known as the coupon rate), investors will not want to pay full price for a bond that pays a lower interest rate than they could get elsewhere. As a result, the bond will sell at a discount to its face value in order to make up for the lower interest payments.
Learning Objectives
- Acquire knowledge on the fundamentals of bonds, their features, and the variances between contractual and market interest rates.
- Comprehend the accounting approaches for bonds released at a premium, discount, or nominal value, and the ensuing recognition of interest costs.
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