Question

Adonis Corporation issued 10-year, 7% bonds with a par value of $280,000. Interest is paid semiannually. The market rate on the issue date was 6%. Adonis received $300,836 in cash proceeds. Which of the following statements is true?

A) The market rate was higher than the coupon rate, resulting in a discount on the bonds.
B) The market rate was lower than the coupon rate, resulting in a premium on the bonds.
C) The market rate and the coupon rate were equal, resulting in the bonds being issued at par value.
D) The market rate affected the maturity value of the bonds.

Answer 1

The market rate was higher than the coupon rate, resulting in a discount on the bonds.

Step-by-step explanation:

The correct statement is A) The market rate was higher than the coupon rate, resulting in a discount on the bonds.

When the market rate is higher than the coupon rate, it means that investors require a higher return on their investment. As a result, the bond will sell for less than its par value. In this case, Adonis Corporation received $300,836 in cash proceeds, which is more than the par value of $280,000. This indicates that the bonds were issued at a discount.