Asked by Jhollo Redondo on Jun 26, 2024
Verified
When a bond is sold at a premium the
A) effective interest rate is less than the stated rate.
B) effective interest rate is greater than the stated rate.
C) effective interest rate relative to the stated rate is not known.
D) interest expense during the life of the bond exceeds the amount of cash interest payments during the life of the bonD.
Effective Interest Rate
The real rate of return on a loan or financial product, reflecting the actual interest earned or paid over a specified period, including the effect of compounding.
Stated Rate
The interest rate declared on a financial instrument, such as a bond or loan, which may differ from the effective or market rate of interest.
- Investigate the relationship between market interest rates, bond prices, and interest costs.
Verified Answer
JH
Jenny HowardJun 29, 2024
Final Answer :
A
Explanation :
When a bond is sold at a premium, it means the bond's selling price is higher than its face value. This occurs because the bond's stated interest rate is higher than the market interest rate. As a result, the effective interest rate, which is the actual rate earned by the bondholder, is less than the stated rate. This is because the bondholder pays more for the bond upfront but still receives the same nominal interest payments, effectively reducing the yield.
Learning Objectives
- Investigate the relationship between market interest rates, bond prices, and interest costs.