If bonds are issued at a discount it means that the
A) financial strength of the issuer is suspect.
B) market interest rate is higher than the contractual interest rate.
C) market interest rate is lower than the contractual interest rate.
D) bondholder will receive effectively less interest than the contractual interest rate.

Question

Quizplus · Accepted Answer

Bonds issued at a discount means that the market interest rate is higher than the contractual interest rate. This is because the issuer must offer a lower price for the bond to compensate for the lower interest payments. This is not necessarily an indicator of the financial strength of the issuer, but rather reflects current market conditions. The bondholder will receive the contractual interest rate, but the effective yield will be higher due to the lower purchase price. When bonds are issued at a discount, it means that the market interest rate is higher than the contractual interest rate. This is because investors are only willing to purchase the bonds at a lower price in order to achieve a return that meets their desired rate of return based on the current market interest rate. This also means that bondholders will receive effectively less interest than the contractual interest rate, as they will only receive interest payments based on the lower purchase price rather than the face value of the bond. A bond issued at a discount does not necessarily indicate a suspect financial strength of the issuer, as it may be a strategic decision based on market conditions.

If Bonds Are Issued at a Discount It Means That