Chapter 10, Problem 1MCQ

To determine

Bond:

The bond is a kind of security which is used for debt investment. The investor finances a certain amount of money for a determined time period and interest rate. The amount which is paid as an interest on the time of issuance of the bond is known as the bond interest expense.

To determine: The meaning of bond traded at ${97}^{1/2}$

Explanation of Solution

Option b, the bond trades at $975 per $1,000 is correct.

b.

The bond traded at ${97}^{1/2}$ means that the bond is traded at $975 per $1,000 bonds. The trading amount shows the actual cost of the bond in the market.

a.

The bond pays ${97}^{1/2}\%$ is wrong as the bond traded at ${97}^{1/2}$ does not has any relation with the value of the interest.

c.

The meaning of the bond trading at ${97}^{1/2}$ does not means that the market rate of interest is below the contract rate of interest for the bond. This only shows that the bond will be traded at $975 per $1,000.

d.

The bond trading at ${97}^{1/2}$ does not means that the bond can be retired at $975 each. This only shows that at what value the bonds can be traded.

e.

The bond’s interest rate is $2^{1/2}\%$ is wrong as the bond traded at ${97}^{1/2}$ does not has any relation with the rate of interest, it shows the trading value of the bonds.

Thus, the option b. is correct.