Asked by Alyssa Squissato on Jun 22, 2024
Verified
When the market rate of interest is less than the contract rate for a bond, the bond will sell for a premium.
Market Rate
The prevailing interest rate available in the marketplace for instruments of similar risk and maturity.
Contract Rate
The interest rate to be paid on the face amount of a bond as specified in the bond indenture.
Premium
An amount paid in addition to the standard price or cost, often in exchange for a service, insurance coverage, or higher-quality good.
- Familiarize oneself with the mechanisms of bond pricing and the influences on the prices at which bonds are traded, including both market and bond-specific interest rates.
Verified Answer
BD
Brianna DelisleJun 29, 2024
Final Answer :
True
Explanation :
When the market rate of interest is less than the contract rate for a bond, investors are willing to pay a premium to receive the higher interest rate. This is because the bond offers a higher yield than other similar investments available in the market.
Learning Objectives
- Familiarize oneself with the mechanisms of bond pricing and the influences on the prices at which bonds are traded, including both market and bond-specific interest rates.