The following information about two independent bond issues was reported in the financial press.
1. BC Provincial 2.70% bonds, maturing December 18, 2022, were issued at a price of 99.9 to yield a market interest rate of 2.71%.
2. Bank of Montreal 5.10% bonds, maturing April 21, 2021, were issued at a price of 108.97 to yield a market interest rate of 2.08%.
Instructions
(a) Were the BC Provincial bonds issued at a premium or a discount?
(b) Were the Bank of Montreal bonds issued at a premium or a discount?
(c) Explain why the market interest rate on the Bank of Montreal bonds is lower than the market interest rate on the BC Provincial bonds.
(d) Record the issue of $100,000 of each of these two bonds.