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A corporation's bond carries a 12% contract rate while the market rate is 11%. How will the bond be issued?
AAt a discount, below face amount
BAt a premium, above face amount
CAt face amount
DIt cannot be issued at all
Answer & Solution
Correct answer: B. At a premium, above face amount
1. Compare contract rate (12%) with market rate (11%).
2. The contract rate is greater than the market rate, so this bond pays more interest than comparable bonds.
3. Investors will pay extra up front for the richer interest stream, so the bond sells at a premium (above face amount).
4. A discount (option A) occurs only when the contract rate is below market.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §5.4 "Bonds", p.224_
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