Bonds sold at a discount will have an effective (market)interest rate that is higher than the stated interest rate.

Question

Quizplus · Accepted Answer

Bonds sold at a discount have a price that is lower than the face value (or par value) of the bond. Since the interest payment (coupon payment) is calculated based on the face value, the effective interest rate (which takes into account the price paid for the bond) will be higher than the stated interest rate. For example, if a bond with a face value of $1,000 and a stated interest rate of 5% is sold at a discount for $900, the coupon payment will still be $50 per year (5% of $1,000), but the effective interest rate will be higher because the investor is receiving $50 on an investment of $900, rather than $1,000.

Bonds Sold at a Discount Will Have an Effective (Market)interest