CFA Practice Question

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CFA Practice Question

Gemstone Company issued $1,000,000 of 20-year, 6% bonds. The carrying value at the issue date is $980,000. The market rate of interest at the issue date is ______.

A. exactly equal to 6%
B. greater than 6%
C. less than 6%
Correct Answer: B

The bonds were issued at a discount (the carrying amount is lower than the face amount) because the market rate (also called yield rate or effective rate) is higher than the coupon rate. The discount compensates investors for the unattractively low coupon rate.

User Contributed Comments 4

User Comment
Will1868 The yield moves inversley with the price
Jurrens You would have to assume since price is lower than value, so they're selling at a discount meaning the rate in the market is higher
2014 when discount; market is more than coupon rate.
When premium; coupon rate is more than market rate
gill15 Everything seems SOOO EASY now that taxes are done.
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