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A corporation issues $100,000 of five-year, 12% bonds when the market rate is also 12%. At what price are the bonds issued?
AAt a discount, below $100,000
BAt a premium, above $100,000
CAt twice the face amount, $200,000
DAt face amount, $100,000
Answer & Solution
Correct answer: D. At face amount, $100,000
1. Compare the contract rate (12%) with the market rate (12%).
2. When the contract rate equals the market rate, the bond's interest payments match comparable bonds.
3. The bond is therefore competitive and sells at its face amount.
4. A discount (option A) arises only when the contract rate is below market; a premium (option B) only when it is above.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §5.4 "Bonds", p.222_
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