When is a bond issued at a discount?

• A. When the market rate exceeds the stated interest rate
• B. When the stated interest rate is equal to the market rate
• C. When the stated interest rate is less than the market rate
• D. When the bond is not callable

Answer: (C)

A bond is issued at a discount when the stated interest rate (the coupon rate) is less than the market interest rate. In this scenario, investors require a higher return than what the bond's stated rate offers, leading them to pay less than the face value of the bond. The difference between the face value and the lower price paid reflects the additional yield required by investors in order to make the investment attractive compared to other available securities that may provide higher returns.

When the stated interest rate is lower than the market rate, it results in the bond being sold at a price that is less than its face value, which is referred to as a discount. This discount compensates investors for accepting a lower interest rate than what is currently available in the market.

In contrast, if the stated interest rate equals the market rate, the bond would typically be issued at par - meaning investors would pay exactly the face value. Conversely, if the market rate is lower than the stated rate, the bond would be issued at a premium, meaning investors would pay more than the face value due to the higher returns it offers compared to market options. The characteristic of a bond being callable does not affect whether it is issued at a discount, premium, or par, but instead relates