If bonds are issued at 102.25, this means that: Answer A. The bond rate of inter

Question

If bonds are issued at 102.25, this means that:
Answer A. The bond rate of interest is 10.22% of the market rate of interest
B. A $1,000 bond sold for $1,022.50
C. The bonds sold at a discount
D. A $1,000 bond sold for $102.25 If bonds are issued at 102.25, this means that:
The bond rate of interest is 10.22% of the market rate of interest
A $1,000 bond sold for $1,022.50
The bonds sold at a discount
A $1,000 bond sold for $102.25 A. The bond rate of interest is 10.22% of the market rate of interest
B. A $1,000 bond sold for $1,022.50
C. The bonds sold at a discount
D. A $1,000 bond sold for $102.25

Explanation / Answer

The price of a bond is based on the market's assessment of any risk associated with the company that issues (sells) the bonds. The higher the risk associated with the company, the higher the interest rate. Bonds issued with a coupon interest rate (also called contract rate or stated rate) higher than the market interest rate are said to be offered at a premium. The premium is necessary to compensate the bond purchaser for the above average risk being assumed. Bonds are issued at adiscount when the coupon interest rate is below the market interest rate. Bonds sold at a discount result in a company receiving less cash than the face value of the bonds.

Bonds are denominated in $1,000s. A market price of 100 means the bond sold for 100% of face value. If its face value is $1,000, the sales price was $1,000. A bond sold at 102.25, a premium, would generate $1,022.5 cash for the issuing company (102.25% × $1,000) while one sold at 97, a discount, would provide $970 cash for the issuing company (97% × $1,000).

Hence,

B. A $1,000 bond sold for $1,022.50 is the correct answer

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