Chapter 14, Problem 1MCQ

A bond traded at 97½ means that

1. a. The bond pays 97½% interest.
2. b. The bond trades at $975 per $1,000 bond.
3. c. The market rate of interest is below the contract rate of interest for the bond.
4. d. The bonds can be retired at $975 each.
5. e. The bond’s interest rate is 2½%.

To determine

Ascertain the meaning if the bond is traded at ${97}^{1/2}$.

Answer to Problem 1MCQ

Option b. The bond trades at $975 per $1,000 bond.

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Buying and selling of bond in the market at ${97}^{1/2}$ means that the bond is traded at 97.5% or at

$975 per $1,000 bond and it is issued less than the face value of the bond ($975<$1,000).

Therefore, Option b. The bond trades at $975 per $1,000 bond is the correct option and the other options of a, c and d are incorrect.