The Cases Company issues $800 000 of 7%,10-year debentures on 31 March 2016.The debenture pays interest on 31 March and 30 September.Which of the following statements is TRUE?
A)If the market rate of interest is 8%,the debentures will issue at a discount.
B)If the market rate of interest is 8%,the debentures will issue at a premium.
C)If the market rate of interest is 8%,the debentures will issue at par.
D)If the market rate of interest is 8%,the debentures will issue above par.

Question

Quizplus · Accepted Answer

The debentures are issued at par when the market rate of interest is equal to the coupon rate (7%). However, if the market rate of interest is higher (in this case, it is 8%), the debentures will issue at a discount. This is because investors will only be willing to pay a lower price for the debentures in order to achieve a yield that is in line with the market rate.

The Cases Company Issues $800 000 of 7%,10-Year Debentures on 31