Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 185

A bond that matures after one year has a face value of $250,000 and a coupon of $30,000. If the market price of the bond is $265,000, which of the following would be the market interest rate?

Answer options

• A. Less than 12 percent.
• B. 12 percent.
• C. Between 12.01 percent and 12.50 percent.
• D. More than 12.50 percent.

Correct answer: A

Explanation

The market interest rate is calculated by dividing the coupon payment by the market price of the bond. In this case, $30,000 divided by $265,000 is approximately 11.32 percent, which is less than 12 percent. The other options are incorrect as they suggest rates that are higher than the calculated rate.