Display replies in nested form Chapter 14 Discussion Friday, January 1, 2021, 11:38 AM Your business associate mentions that she is considering investing in corporate bonds currently selling at a premium

The associate is confused concerning the idea of a bond premium.

Bonds that sell at a premium provide the issuing company more cash than they are required to pay the bondholders at their maturity date. When a bond is issued at a premium, the face amount is less than the amount the associate will invest to acquire the bond. As a result, the investment will yield the investor (and cost the issuing corporation) less than the contract rate of interest. This means that selling/buying at a premium incurs/yields an effective rate of interest equivalent to the market rate for the risk assessed for that bond at the time of issuance. In addition, this market rate of interest is lower than the contract rate of interest for premium bonds.

The market prices the bonds according to their perceived risks and returns. What your associate needs to focus on is the level of risk she is willing to accept and then invest accordingly.