Question

ABC Company is in the process of issuing bonds. The bonds have a stated interest rate of 6%, which is 2% above the current market rate. What effect will the two interest rates have on the bond issue price?

a) The issue price will be above the bond's face value.
b) The issue price will be below the bond's face value.
c) The issue price will equal the bond's face value.

Answer 1

When the stated interest rate is higher than the market rate, it means that the bonds are offering a higher yield compared to other investments. This makes the bonds more attractive to investors, which drives up demand and increases the bond issue price. Option a

Step-by-step explanation:

The stated interest rate of 6% on the bonds is 2% higher than the current market rate. When the stated interest rate is higher than the market rate, it means that the bonds are offering a higher yield compared to other investments.

This makes the bonds more attractive to investors, which drives up demand and increases the bond issue price. Therefore, the answer is a) The issue price will be above the bond's face value.