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Chapter 12: Q2TI (page 628)

Determine whether the following bonds payable will be issued at face value, at a premium, or at a discount:

3. A 10% bonds payable is issued when the market interest rate is 8%.

4. A 10% bonds payable is issued when the market interest rate is 10%.

5. A 10% bonds payable is issued when the market interest rate is 12%.

Short Answer

Expert verified

A bond issued at a discount is less than its face value.

Step by step solution

01

Definition of bonds

The bonds are the type of long-term liabilities because a company issues these to fulfil its long-term money needs. Generally, bonds are issued by large size companies.

02

 Issue the bonds  

3. The following bonds are issued at a discount because the market interest rate of the bonds is less than the face value interest rate. Hence, these bonds are issued at a discount.

4. The following bonds are issued at face value because the market interest rate of the bonds and the face value interest rate of the bonds are the same. Hence, these bonds are issued at face value.

5. The following bonds are issued at a premium because the market interest rate is more than the face value of the bonds. Hence, the given bonds are issued at a premium.

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Most popular questions from this chapter

Bond prices depend on the market rate of interest, stated rate ofinterest,and time.

Requirements

1. Compute the price of the following 8% bonds of Country Telecom.

a. \(100,000 issued at 75.25

b. \)100,000 issued at 103.50

c. \(100,000 issued at 94.50

d. \)100,000 issued at 103.25

2. Which bond will Country Telecom have to pay the most to retire at maturity?Explain your answer.

Your grandfather would like to share some of his fortune with you. He offers to give

you money under one of the following scenarios (you get to choose):

1. \(8,750 per year at the end of each of the next six years

2. \)49,650 (lump sum) now

3. $100,450 (lump sum) six years from now

C H A P T E R 1 2

Requirements

1. Calculate the present value of each scenario using a 6% discount rate. Which scenario

yields the highest present value? Round to the nearest dollar.

2. Would your preference change if you used a 12% discount rate?

How does compound interest differ from simple interest?

When does a premium on bonds payable occur?

Determining bond amounts

Savvy Drive-Ins borrowed money by issuing $3,500,000 of 9% bonds payable

at 99.5. Interest is paid semiannually.

Requirements

1. How much cash did Savvy receive when it issued the bonds payable?

2. How much must Savvy pay back at maturity?

3. How much cash interest will Savvy pay each six months?
See all solutions

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