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What happens when issuing bonds payable when the market interest rate is less than the stated interest rate?
premium
When a bonds stated interest rate is less than the market interest rate is the rate at a discount or premium?
When the coupon rate (the contractual periodical "interest" payments) are lower than the yield (the market required return) the bond will be in discount. This discount makes up for the low value of the coupons.
How can bonds issued by two companies paying same contractual interest rate be issued at different prices?
To calculate present value of the bond you also need to know market interest rate. If , for example these companies were issuing their bonds in the different time and market interest rate was different then bond could be sold at premium(the bond will cost more then its face value), par (same as face value), and discount (bond will cost less then face value.)
What type of bond has the highest risk?
High risk bonds are called junk bonds.
Why junk bonds pay a higher interest rate than government bonds of similar maturity?
Interest rates increase as perceived risk increases. Government bonds have virtually no risk. Junk bonds are so called because they carry a high risk of default.
