Bonds sell at a premium when the

Question

Quizplus · Accepted Answer

When a bond is issued, it comes with a fixed interest rate, known as the coupon rate or stated interest rate. This rate determines the amount of interest the bond will pay to bondholders. The market rate of interest, also known as the yield, is the return investors require on a bond at any given time, based on the current market conditions.
If the market rate of interest falls below the bond's stated interest rate after the bond is issued, new bonds being issued will have lower interest rates. This makes the existing bonds with higher interest rates more attractive to investors, as they offer a higher return than what can be obtained from newly issued bonds. As a result, these existing bonds will be in higher demand, and investors will be willing to pay more than the face value to acquire them, causing the bonds to sell at a premium.
Therefore, the correct answer is:
b. market rate of interest is less than the stated interest rate at the time of issue.

Bonds Sell at a Premium When the