Bond X and bond Y both are issued by the same company. Each of the bonds has a face value of $100,000 and each pays interest at 8%. The current market rate of interest is 8%. Bond X matures in 7 years while bond Y matures in 25 years. Which of the following is correct? A) Both bonds sell for the same amount. B) Both bonds sell for more than $100,000. C) Bond X sells for more than bond Y. D) Bond Y sells for more than bond X O A O B
Bond X and bond Y both are issued by the same company. Each of the bonds has a face value of $100,000 and each pays interest at 8%. The current market rate of interest is 8%. Bond X matures in 7 years while bond Y matures in 25 years. Which of the following is correct? A) Both bonds sell for the same amount. B) Both bonds sell for more than $100,000. C) Bond X sells for more than bond Y. D) Bond Y sells for more than bond X O A O B
Chapter13: Long-term Liabilities
Section: Chapter Questions
Problem 2EA: Beluga Inc. issued 10-year bonds with a face value of $100,000 and a stated rate of 3% when the...
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Transcribed Image Text:Bond X and bond Y both are issued by the same company. Each of the bonds has a face value of $100,000 and each pays
interest at 8%. The current market rate of interest is 8%. Bond X matures in 7 years while bond Y matures in 25 years. Which of
the following is correct?
A) Both bonds sell for the same amount.
B) Both bonds sell for more than $100,000.
C) Bond X sells for more than bond Y.
D) Bond Y sells for more than bond X
OD
O o o o
Expert Solution
Concept
The issue price of Bonds is equal to the present value of all coupon payments and maturity value discounted at market rate of interest.
- If the Market rate of interest is more than coupon rate stated on the bonds, bonds sell at a discount.
- If the Market rate of interest is less than coupon rate stated on the bonds, bonds sell at a premium.
- If the Market rate of interest is equal than coupon rate stated on the bonds, bonds sell at par value.
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