Question

B. Explain why the company was able to issue the bonds for $22,282,220 rather than for the face amount of $21,300,000.

The bonds sell for_______ than their face amount because the market rate of interest is____________Correct the contract rate of interest. Investors _________ (are, are not) Correct willing to pay more for bonds that pay a higher rate of interest (contract rate) than the rate they could earn on similar bonds (market rate).

Answer 1

The company was able to issue the bonds for $22,282,220 rather than the face amount of $21,300,000 because the market rate of interest rose. Investors are willing to pay more for bonds that offer a higher interest rate. When interest rates rise, bonds with lower interest rates become less attractive to investors.

Step-by-step explanation:

When interest rates rise, the value of bonds issued at lower interest rates will decrease. In this case, the bond had an interest rate of 8%, but the market rate of interest rose to 12%. To attract investors who could find bonds paying a higher rate of interest, the company had to lower the price of the bonds below their face value of $21,300,000. This is why they were able to issue the bonds for $22,282,220.

Investors are willing to pay more for bonds that pay a higher rate of interest (contract rate) than the rate they could earn on similar bonds (market rate). When interest rates rise, bonds with lower interest rates become less attractive, so investors are less willing to pay their face value for them.