Question

When a bond sells at a premium, interest expense will be:

A. equal to the bond interest payment.
B. greater than the bond interest payment.
C. less than the bond interest payment.
D. None of these answer choices are correct.

Answer 1

When a bond sells at a premium, the interest expense will be less than the bond interest payment.

Step-by-step explanation:

When a bond sells at a premium, interest expense will be less than the bond interest payment. When interest rates fall after a bond is issued, the investor has locked in a higher rate, which increases the demand for the bond and drives up its price. As a result, the interest expense paid by the issuer will be lower compared to the bond interest