Question

Karson Inc. issues 10-year bonds with a maturity value of $200,000. If the bonds are issued at a discount, this indicates that:

a. the contractual interest rate exceeds the market interest rate.
b. the market interest rate exceeds the contractual interest rate.
c. the contractual interest rate and the market interest rate are the same.
d. no relationship exists between the two rates.

Answer 1

When a bond is issued at a discount, it means that the market interest rate is higher than the contractual interest rate.

Step-by-step explanation:

When a bond is issued at a discount, it means that the market interest rate is higher than the contractual interest rate. This is because when the market interest rate is higher, the bond becomes less attractive to investors and the issuer needs to lower its price to make it more appealing. In the case of Karson Inc., if their 10-year bonds are issued at a discount, it indicates that the market interest rate exceeds the contractual interest rate.