Final answer:
To determine if a bond is issued at a discount or premium, compare the present value of the bond's cash flows (using the market interest rate) to its face value. A higher market rate than the coupon rate results in a discount; a lower market rate results in a premium. Swifty Industries' bond, with a market rate higher than the coupon, is issued at a discount.
Step-by-step explanation:
The question asks us to calculate the present value of a bond given its face value, coupon rate, and effective interest rate, and then determine if the bond is issued at a discount or premium. When the market interest rate, or effective interest rate, is higher than the coupon rate, the bond is issued at a discount. Conversely, if the market rate is lower than the coupon rate, the bond is issued at a premium. To find the discount or premium, we compare the present value of the bond's cash flows (calculated using the market interest rate) with its face value.
Let's use the example of the simple two-year bond issued at $3,000 with an 8% interest rate. This bond will pay $240 in interest annually. If we use an 8% discount rate, the present value of the bond's cash flows will equal the face value. However, if the discount rate increases to 11%, the present value will be less than the face value, meaning the bond would be sold at a discount.
Applying this to Swifty Industries Inc.'s $99,000, 6% bond with a 7% market interest rate, we can say that since the market rate is higher than the coupon rate, the bond will be issued at a discount. This discount reflects the difference between the bond's face value and the present value of its future cash flows calculated using the effective interest rate.