ABC Corp.'s balance sheet shows its long-term debt to be $20 million.The debt was issued with a 10% interest rate,and the current interest rate is 7%.Based on this information alone,the market value of this debt is most likely:
A) less than $20 million.
B) more than $20 million.
C) equal to $20 million.
D) unknown without knowing the maturity of the debt.

Question

Quizplus · Accepted Answer

When the current interest rate is lower than the coupon rate of the debt, the market value of the debt is likely to be more than its face value, as investors are willing to pay a premium for the higher interest payments.

ABC Corp'S Balance Sheet Shows Its Long-Term Debt to Be $20