Final answer:
The issue price of Primo, Inc.'s bonds, which have a coupon rate higher than the market interest rate, will be above their face value due to the principle of bond pricing. An example given is that a bond's value will decrease if the market interest rate is higher than the bond's coupon rate when being traded on the secondary market.
Step-by-step explanation:
The question deals with the concept of bond pricing and how market interest rates affect the issue price of bonds. Primo, Inc. issued $50,000, 5-year, 7% bonds that pay interest annually on January 1 when the going market interest rate was 6%. Since the bond's coupon rate is higher than the market interest rate, the bonds will be issued at a premium. To calculate the issue price of the bonds, we need to discount the future cash flows (annual interest payments and the principal at maturity) at the market interest rate which is 6%. In this case, the bond's issue price will be higher than its face value, but without further calculation, we cannot determine the exact figure from the given options.
As an example for the bond pricing concept, consider a $10,000, ten-year bond with a 6% interest rate. If you were to buy this bond one year before maturity when the market interest rate is 9%, you would pay less than the face value of $10,000 because the bond's fixed interest payments are less attractive when compared to new bonds issued at the current higher market rate of 9%. To price this bond, one would discount the bond's remaining cash flows (the last interest payment and the principal repayment) at the new market rate of 9%. This results in a price lower than $10,000. Similarly, if interest rates drop below the bond's coupon rate, its value would increase above its face value.