Which of the following statements is true of a bond that is issued at a discount?

• A. The bond will pay no interest to investors.
• B. The bond's stated interest rate is lower than the market interest rate at the time of issuance.
• C. The bond is sold for more than its face value.
• D. The bond's stated interest rate is higher than the market interest rate at the time of issuance.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of a bond issued at a discount. A bond is issued at a discount when its selling price is less than its face value. This typically happens when the bond's stated interest rate (coupon rate) is lower than the prevailing market interest rate.
2. Step 2: Analyze the relationship between the stated interest rate and the market interest rate. If the stated interest rate is lower than the market interest rate, investors will demand a discount to compensate for the lower return compared to other investments available in the market.
3. Step 3: Evaluate the options provided in the problem. The first option, 'The bond will pay no interest to investors,' is incorrect because bonds issued at a discount still pay interest based on their stated interest rate. The third option, 'The bond is sold for more than its face value,' is incorrect because a bond issued at a discount is sold for less than its face value. The fourth option, 'The bond's stated interest rate is higher than the market interest rate at the time of issuance,' is incorrect because this scenario would result in a bond being issued at a premium, not a discount.
4. Step 4: Identify the correct statement. The second option, 'The bond's stated interest rate is lower than the market interest rate at the time of issuance,' is correct because it explains why the bond is issued at a discount.
5. Step 5: Summarize the reasoning. Bonds issued at a discount occur when the stated interest rate is less attractive than the market interest rate, leading investors to pay less than the bond's face value to achieve a competitive yield.