A company issues a $100,000K 9% bond and receives $99,000K (ignoring transaction costs). This implies that the effective interest rate is less than 9%.

Question

Quizplus · Accepted Answer

The fact that the company issued the bond at a discount (receiving less than the face value) does not necessarily mean that the effective interest rate is less than 9%. In fact, the effective interest rate would be higher than 9% in this case, as the company would have to pay back the full face value of the bond ($100,000K) at maturity.

A Company Issues a $100,000K 9% Bond and Receives $99,000K