When the market rate of interest is equal to the contract rate of interest, the bonds should sell at
A)a premium
B)par
C)an inflation-adjusted discount
D)a discount

Question

Quizplus · Accepted Answer

When the market rate of interest is equal to the contract rate of interest, the bond should sell at par (face value) because investors will be indifferent between buying the bond at par or investing their money elsewhere at the same rate of return. Therefore, there is no need for the bond to sell at a premium or a discount. An inflation-adjusted discount may occur if the bond's contract rate of interest is not adjusted for inflation and inflation has reduced the bond's purchasing power. A discount may occur if the contract rate of interest is lower than the market rate of interest, making the bond less attractive to investors.

When the Market Rate of Interest Is Equal to the Contract