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Bonds Premium and Discounts (Financial Accounting)

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bond discounts if an investor is

choosing between two alternatives of

similar risk both yielding 6% interest

the investor would not be better off by

choosing one over the other however if

the bond alternative is offering 5%

while the similar risk alternative

yields 7% a rational investor would

choose the alternative with the higher

rate of return which is 7% the business

cannot sell the bond at its face value

in such a scenario it would be able to

sell it if it offered that at a discount

let's illustrate assume that a business

offered to issue a bond that heals 5%

while the interest rate of a similar

risk investment is 7% in order to sell

the bond the business sells it's at a

discount so instead of selling it at its

face value of $1,000 it sells it for 900

only in this case the business collects


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