Final answer:
A bond's issue price is determined by the issuing company, which borrows money from investors through bonds, agreeing to return the principal and interest. Bonds allow companies to raise capital without diluting ownership, unlike stocks.
Step-by-step explanation:
The issue price of a bond is determined by the issuing company. When a firm decides to issue bonds, it is a way of borrowing money from investors. The company agrees to pay back the original sum borrowed at the end of a set period, along with periodic interest payments. These bonds are divided into smaller units, making it easier for individual investors to purchase them. In essence, investors lend money to the issuing company and become bondholders, who have the right to receive interest payments and, ultimately, the return of the principal amount.
When setting the issue price, several factors come into play, including the current interest rate environment, the creditworthiness of the issuing company, and the bond's terms, such as its interest rate and maturity date. Although investing in bonds has its risks (e.g., the company may fail to make interest payments or return the principal), it provides an alternative means for a company to raise capital without relinquishing control to shareholders, unlike issuing stock.