State Street Beverage Company issues $805,000 of 9%, 10-year bonds on March 31, 2017. The bonds pay interest on March 31 and September 30. Which of the following statements is true?

A) If the market rate of interest is 10%, the bonds will issue at a premium.

B) If the market rate of interest is 10%, the bonds will issue at a discount.

C) If the market rate of interest is 10%, the bonds will issue at par.

D) If the market rate of interest is 10%, the bonds will issue above par.

Question

Business

Albert Fisher

26 July, 08:58

State Street Beverage Company issues $805,000 of 9%, 10-year bonds on March 31, 2017. The bonds pay interest on March 31 and September 30. Which of the following statements is true?

A) If the market rate of interest is 10%, the bonds will issue at a premium.

B) If the market rate of interest is 10%, the bonds will issue at a discount.

C) If the market rate of interest is 10%, the bonds will issue at par.

D) If the market rate of interest is 10%, the bonds will issue above par.

+2

Answers (1)

Know the Answer?

Deegan Greene · Answer 1

Option (B) If the market rate of interest is 10%, the bonds will issue at a discount

Explanation:

Interest rate risk is defined as the risk changing which, interest rates will affect bond prices. When current interest rates are greater than a bond's coupon rate, the bond will be sold below its face value at a discount. When interest rates are less than the coupon rate, the bond can be sold at a premium--higher than the face value.