Davis & Davis issued $1,000 par value bonds at 102. The bonds pay 12% interest annually and mature in 30 years. The market rate of interest is (round to the nearest hundredth of a percent)

Question

Quizplus · Accepted Answer

The market rate of interest is determined by the price of the bond relative to its par value and the interest payments it makes. Since the bond was issued at 102% of its par value ($1,020 for a $1,000 bond) and pays 12% interest annually ($120 per year), the market rate of interest is slightly lower than the coupon rate because the bond was issued at a premium. The correct calculation involves finding the yield to maturity, which equates the present value of the bond's future cash flows (interest payments and the repayment of the par value at maturity) to its current market price. The answer closest to this calculation, given the options, is 11.71%.

Davis & Davis Issued $1,000 Par Value Bonds at 102