Question

Round Dot Inns Is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature In 10 years and will be sold at par. Given this, which one of the following statements Is correct?
A) The bonds will sell at a premium if the market rate is 5.5 percent.
B) The bonds will become discount bonds if the market rate of interest declines.
C) The bonds will pay 10 interest payments of $60 each.
D) The bonds will initially sell for $1,030 each.
E) The final payment will be in the amount of $1,060.

Answer 1

Answer:

A) The bonds will sell at a premium if the market rate is 5.5 percent.

Explanation:

We know that, if the bonds are sold at par, the coupon rate and the interest rate is equal

If the coupon rate is more than the interest rate, then the bonds are sold at a premium

And, if the coupon rate is less than the interest rate, then the bonds are sold at a discount

So, by the above explanations, the option A is most appropriate, as coupon rate is 6% and the market rate is 5.5% which is lower than the coupon rate that means it is sold at a premium