Which term describes the situation when a bond is issued for less than its face value?

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Master the UCF ACG2021 Principles of Financial Accounting Final Exam. Study with comprehensive practice tests, flashcards, and multiple choice questions, each with detailed explanations. Ace your exam!

When a bond is issued for less than its face value, it is referred to as a discount bond issuance. This situation arises because the market interest rate is higher than the coupon rate of the bond. As a result, investors are not willing to pay the full face value for the bond, thus driving the price down at issuance.

A discount bond essentially reflects the reduced cash flows that the investor will receive, as the nominal interest payments are lower than what could potentially be earned elsewhere in the market. This incentivizes investors, who might otherwise avoid purchasing such a bond, to buy it at a lower price in order to achieve a more attractive yield when the bond matures and they receive its full face value.

In contrast, terms like premium bond issuance refer to the scenario where bonds are sold for more than their face value, equity bond issuance does not apply to standard bonds as it relates to shares of ownership in a company, and convertible bond issuance pertains to bonds that can be converted into a specified number of shares in the issuing company. Each of these terms has distinct implications within the realm of financial instruments and capital markets.