Final answer:
Smart Touch Learning cannot issue its bonds at a premium when the bond’s interest rate is lower than the market rate. A bond generally sells at a discount when its coupon rate is less than the market interest rate, making the statement false (B).
Step-by-step explanation:
When a company issues bonds, the interest rate offered on these bonds is compared to the prevailing market interest rate to determine how they are priced. If the coupon interest rate of the bond is lower than the market interest rate, the bond will typically sell at a discount, and vice versa, if the coupon rate is higher than the market interest rate, the bond will sell at a premium.
For Smart Touch Learning's 5-year, $100,000 bonds with a 10% interest rate, when the market rate of interest is 12%, these bonds would be expected to offer a lower return than what is available on the market. Therefore, investors would not be willing to pay more than the face value, making the statement false: Smart Touch Learning will not be able to issue these bonds at a premium because the bonds offer a less attractive investment compared to the current market rate.
In the case of a simple two-year bond issued at 8%, if market interest rates rise, the present value of the bond's future payments will be worth less when discounted back at the higher market rate. This depreciates the bond's value if the market interest rate is higher than the coupon rate.