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A corporation's bond has an 11% contract rate while the market rate is 12%. How will the bond be issued?
AAt a premium, above face amount
BAt face amount
CAt a discount, below face amount
DAt a price equal to total interest paid
Answer & Solution
Correct answer: C. At a discount, below face amount
1. Compare contract rate (11%) with market rate (12%).
2. The contract rate is less than the market rate, so this bond pays less interest than comparable bonds.
3. To stay competitive the issuer must lower the price, so the bond sells at a discount (below face amount).
4. A premium (option A) occurs only when the contract rate exceeds market.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §5.4 "Bonds", p.224_
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