Churchill Company planned to raise $100,000 by issuing bonds. The bond certifica

Question

Churchill Company planned to raise $100,000 by issuing bonds. The bond certificates were printed bearing an interest rate of 8%, which was equal to the market rate of interest. However, before the bonds could be issued, economic conditions forced the market rate up to 9%. If the life of the bonds is 6 years and interest is paid annually on December 31, how much will Churchill receive from the sale of the bonds?

a.            Exactly $100,000 because Churchill Company would still pay interest at the face rate of 8%.

b.            Less than $100,000 because the market rate of interest at 9% was more than the face rate.

c.             Greater than $100,000 because the face rate of interest at 8% was less than the market rate.

d.            The bonds would not be sold at all; Churchill Company would have the certificates reprinted bearing the market rate of 9%.

Explanation / Answer

The correct answer is

b. Less than $100,000 because the market rate of interest at 9% was more than the face rate.

As the market interest rate is more than the face rate he will receive less than $ 100000.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.