For a bond issue that sells for more than the bond face amount, the effective interest rate is:
A) The rate printed on the face of the bond.
B) The Wall Street Journal prime rate.
C) More than the rate stated on the face of the bond.
D) Less than the rate stated on the face of the bond.

Question

Quizplus · Accepted Answer

When a bond sells for more than its face amount (at a premium), the effective interest rate (or yield) is less than the rate stated on the face of the bond. This is because the investor pays more upfront for the same amount of periodic interest payments, thus reducing the effective yield.

For a Bond Issue That Sells for More Than the Bond