Questions: When a bond contract rate is less than the current market rate on the date of issuance, the bond will be sold at a (premium/discount)

When a bond contract rate is less than the current market rate on the date of issuance, the bond will be sold at a (premium/discount)
Transcript text: When a bond contract rate is less than the current market rate on the date of issuance, the bond will be sold at a (premium/discount)
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Solution

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The answer is: discount.

Explanation:

  • When a bond's contract rate (also known as the coupon rate) is less than the current market rate at the time of issuance, investors will not be willing to pay the full face value for the bond. This is because the bond's interest payments are lower than what they could earn from other investments with similar risk profiles in the market.
  • As a result, the bond must be sold at a discount to make it attractive to investors. Selling at a discount compensates for the lower interest payments by providing a capital gain when the bond matures at its face value.
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