A $100,000 5-year 6% bond is issued on January 1, 2020. The bond pays interest annually. The market rate is 7%. What is the discount or premium of the sale of the bonds, rounded to nearest dollar?

Question

Quizplus · Accepted Answer

The bond is issued at a discount because the market interest rate (7%) is higher than the coupon rate (6%). The present value of the bond's payments (interest and principal) must be calculated using the market rate to determine the price at which the bond will sell. Since the bond sells for less than its face value, the difference is a discount. The exact amount of the discount depends on the present value calculations, but without doing the math, we know it's a discount, not a premium, and the only discount option given is $4,100.

A $100,000 5-Year 6% Bond Is Issued on January 1