If bonds were being issued with a stated rate of 8% and the market rate is 9%, the bonds would most likely sell at which of the following?

Question

Quizplus · Accepted Answer

When the stated rate is less than the market rate, the bonds are less attractive to investors because they can receive a higher return elsewhere. Therefore, the price of the bond must decrease in order to increase the effective yield. The bond would sell at a discount, which means the price would be less than 100. The discount would be larger the further the market rate is from the stated rate. In this case, the market rate is 1% higher than the stated rate, indicating a discount of around 5%. Therefore, the most likely choice is C) 95, which represents a price of 95% of the face value of the bond.

If Bonds Were Being Issued with a Stated Rate of 8