Question

23.

If bonds are issued at a premium, the stated interest rateis

A)

higher than the market rate of interest.

B)

lower than the market rate of interest.

C)

too low to attract investors.

D)

adjusted to a higher rate of interest.

24.

$5 million, 8%, 10-year bonds are to be issued at a 6% marketrate. Interest will be paid semiannually. When calculating themarket price of the bond, the rate to be used to calculate thepresent value of the face amount and the present value of theperiodic interest payments is

A)

4%.

B)

3%.

C)

8%.

D)

6%.

Answer 1

23) A) higher than the market rate of interest.

24) D) 6%.

Step-by-step explanation:

23) Whenever a bond sells at a premium it means that the stated interest rate on the bond is higher then the market interest rates because of which investors are willing to pay more for the bond than its par value, because similar bonds are offering less coupon payments. Whenever a bonds stated interest rate will be higher than the market rate of interest investor will pay more than the par value of the bond.

24) Whenever we need to calculate the present value of a bond we use the market interest rate to discount it because that is the rate that the investors require from the bond, where as the stated interest rate on the bond is what the bond is offering, and we cannot use the stated interest rate to calculate the PV because the stated interest rate is set by the issuer and in order to calculate the the present value we will use the market rate interest because that is the rate that the investors require from the bond. In this case the market rate interest is 6%.