My boss issued bonds witha maturity amount of $200,000 and a maturity ten years from date of issue.?

Question

If the bonds were issued at a premium, this indicates that:

A) The effective yield or market rate of interest exceeded the (stated) nominal rate.

B) The nominal rate of interest exceeded the market rate

C)The market and nomnal rates coincided

D)No necessary relationship exists between the two rates.

Answer 1

B. The nominal rate of interest exceeded the market rate.

Think of it like this.  If the coupon on the bond was 6% and market interest rates droped to 5%.  An investor would pay more for the bond with the higher coupon.

As interest rates go up bond prices go down and if interest rates drop bond prices go up.

So there is an inverse relationship between bond prices and interest rates.