Final answer:
When Karson Inc. bonds are issued at face value, it signals that the contractual interest rate and the market interest rate are equivalent, offering the bondholders a competitive yield without the need for price adjustments.
Step-by-step explanation:
When Karson Inc. issues 10-year bonds at face value, it implies that the contractual interest rate (the rate of interest paid by the bonds) is equal to the market interest rate (the return demanded by investors in the market). This means the company's bonds are considered an attractive investment without the need to adjust the price to sell them. The correct answer is:
c. the contractual interest rate and the market interest rate are the same.
Understanding Bond Pricing
Bonds can be issued at face value, premium, or discount. When bonds are issued at face value, investors are content with the interest that the bonds will pay. If the market interest rate is higher than the bond's interest rate, the bond will sell at a discount to make it attractive for investors. Conversely, if the market interest rate is below the bond's rate, it will sell at a premium.