Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Wayne uses the straight-line method of amortization. Interest is paid annually on December 31.If Wayne issued the bonds for 96, the:
A) market rate of interest was equal to the stated rate of interest.
B) market rate of interest was lower than the stated rate of interest.
C) market rate of interest was higher than the stated interest rate.
D) bonds carried a variable or floating rate that changed in response to market conditions.

Question

Quizplus · Accepted Answer

When bonds are issued at a discount (below 100% of face value, in this case at 96), it indicates that the market rate of interest was higher than the stated interest rate on the bonds. This is because investors demand a higher yield due to the prevailing market interest rates being higher than the bond's coupon rate.

Wayne Company Issued Bonds with a Face Value of $600,000