Market Interest Rates and Bond Values
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If the market interest rate is 5% when Mackerel Corp. issues its bonds, will the bonds be prices at par, at premium, or at a discount?
The 6% bonds issued when the market interest rate is 5% will be priced at {a discount, a premium, par (maturity) value}. They are {attractive, unattractive} in this market, so investors will pay {less than maturity value, maturity value, more than maturity value} to acquire them.
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If the market interest rate is 7% Mackerel Corp. issues its bonds, will the bonds be prices at par, at premium, or at a discount?
The 6% bonds issued when the market interest rate is 7% will be priced at {a discount, a premium, par (maturity) value}. They are {attractive, unattractive} in this market, so investors will pay {less than maturity value, maturity value, more than maturity value} to acquire them.
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Solution Summary
This solution discusses the impact of the relationship of market interest rates to a bond's coupon rate on the bond's market price.
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If the market interest rate is 5% when Mackerel Corp. issues its bonds, will the bonds be prices at par, at premium, or at a discount?
The 6% bonds issued when the market interest rate is 5% will be priced at a premium. They are attractive in this market, so investors will pay more than maturity value to acquire them.
In this case, other $1,000 par value ...
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