### Understanding Bond DiscountsA bond sells at a discount when the:#### Multiple Choice- ⬜ Bond has a short-term life.- ⬜ Contract rate is above the market rate.- ⬜ Bond pays interest only once a year.- ⬜ Contract rate is below the market rate.- ⬜ Contract rate is equal to the market rate.**Explanation:**To understand why a bond might sell at a discount, it's important to consider the relationship between the bond's contract rate (also known as the coupon rate) and the prevailing market rate. Here are some key points to note:- **Bond Contract Rate vs. Market Rate:** - If the contract rate of the bond is lower than the current market rate, the bond is less attractive to investors. To make the bond competitive, it will be sold at a discount. - Conversely, if the contract rate is higher than the market rate, the bond would typically sell at a premium because it offers more favorable returns than new issues.- **Key Terms:** - **Contract Rate**: This is the interest rate that the bond issuer agrees to pay bondholders. - **Market Rate**: This is the prevailing interest rate in the marketplace for similar bonds. - **Discount**: Selling below the face value of the bond to increase its attractiveness to investors.Understanding these concepts can help investors make more informed decisions about purchasing bonds and assessing their market value.

A bond is defined as the loan availed or taken from an investor by a borrower. A borrower can be a…

A bond sells at a discount when the: Multiple Choice Bond has a short-term life. Contract rate is above the market rate. Bond pays interest only once a year. Contract rate is below the market rate. Contract rate is equal to the market rate.

A bond sells at a discount when the: Multiple Choice Bond has a short-term life. Contract rate is above the market rate. Bond pays interest only once a year. Contract rate is below the market rate. Contract rate is equal to the market rate.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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