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Chapter 16: Problem 2

a. Is an issuer of a bond a lender or borrower? b. Is a buyer of a bond a lender or borrower?

Short Answer

Expert verified
a. The issuer of a bond is a borrower. b. The buyer of a bond is a lender.

Step by step solution

01

Understanding the Role of the Issuer

In the bond market, the issuer of the bond is the party that creates and sells the bond in order to raise funds. The issuer owes the holders of the bond the amount (also known as principal) they paid to buy the bond, and is obliged to pay this back along with any agreed upon interest. Therefore, the issuer of a bond is a borrower.
02

Understanding the Role of the Buyer

The buyer of the bond, also known as the bondholder, is the party that purchases the bond, thereby providing funds to the issuer. In exchange, the buyer receives the promise of future payments which include the principal and interest. This means that the money is effectively lent to the issuer. Therefore, a buyer of a bond is a lender.

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