Asked by Meliza Acosta on Jul 16, 2024
Verified
The selling price of a $10000 5-year bond will be less than $10000 if the
A) contractual interest rate is less than the market interest rate.
B) contractual interest rate is greater than the market interest rate.
C) bond is convertible.
D) contractual interest rate is equal to the market interest rate.
Contractual Interest Rate
The agreed-upon rate of interest to be paid on a loan, as stated in the loan contract.
Market Interest Rate
The prevailing rate of interest available in the marketplace for borrowers and lenders, often influenced by factors like inflation, economic conditions, and federal monetary policies.
Selling Price
Selling price refers to the amount of money a buyer pays to acquire a product or service from a seller.
- Comprehend the correlation between market interest rates and the value of bonds.
- Grasp the impact on the cost of capital when bonds are sold at a discount or a premium.
Verified Answer
JS
Jason ShallenbergerJul 18, 2024
Final Answer :
A
Explanation :
If the contractual interest rate is less than the market interest rate, investors will demand a discount on the bond to compensate for the lower return. Therefore, the selling price of the bond will be less than $10,000.
Explanation :
If the contractual interest rate is less than the market interest rate, investors will demand a discount on the selling price of the bond in order to compensate for the lower interest payments. Therefore, the selling price of the bond will be less than $10000.
Learning Objectives
- Comprehend the correlation between market interest rates and the value of bonds.
- Grasp the impact on the cost of capital when bonds are sold at a discount or a premium.