Bond X and bond Y both are issued by the same company. Each of the bonds has a face value of $100,000 and each paysinterest at 8%. The current market rate of interest is 8%. Bond X matures in 7 years while bond Y matures in 25 years. Which ofthe following is correct?A) Both bonds sell for the same amount.B) Both bonds sell for more than $100,000.C) Bond X sells for more than bond Y.D) Bond Y sells for more than bond XODO o o o

Answered: Bond X and bond Y both are issued by…

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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Bond X and bond Y both are issued by the same company. Each of the bonds has a face value of $100,000 and each pays
interest at 8%. The current market rate of interest is 8%. Bond X matures in 7 years while bond Y matures in 25 years. Which of
the following is correct?
A) Both bonds sell for the same amount.
B) Both bonds sell for more than $100,000.
C) Bond X sells for more than bond Y.
D) Bond Y sells for more than bond X
OD
O o o o

Expert Solution

Concept

The issue price of Bonds is equal to the present value of all coupon payments and maturity value discounted at market rate of interest.

If the Market rate of interest is more than coupon rate stated on the bonds, bonds sell at a discount.
If the Market rate of interest is less than coupon rate stated on the bonds, bonds sell at a premium.
If the Market rate of interest is equal than coupon rate stated on the bonds, bonds sell at par value.

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