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Chapter 10: Q10DQ (page 473)

If you know the par value of bonds, the contract rate, and the market rate, how do you compute the bonds’ price?

Short Answer

Expert verified

It is calculated by using the present value of bonds.

Step by step solution

01

Meaning of Bonds

Bonds are a type of long-term debtsource for companies. The companies issue these to raise a large amount of money. The companies have to pay interest at regular intervalson the bonds.

02

 Determination of Bond Price

The issue price of the bonds is calculated by determining the present value of the bonds. In calculating the present value, the company uses the semi-annual compounding period for cash payments and discounts. The present value of the bonds is determined using the present value factor. To calculate the bond price, we multiply the PV factor with the par value of bonds. After this, we add the interest payment to calculate the final amount of the bond price.

  • In this, when the contract price of the bonds is less than the market price, it means that bonds are issued at a discount.
  • If the contract price exceeds the market rate, the bonds are issued at a premium.
  • When the contract rate and the market rate are equal, it means bonds are issued at par.

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Most popular questions from this chapter

Citywide Company issues bonds with a par value of $150,000 on their stated issue date. The bonds mature in five years and pay 10% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 8%.

1. What is the amount of each semiannual interest payment for these bonds?

2. How many semiannual interest payments will be made on these bonds over their life?

3. Use the interest rates given to determine whether the bonds are issued at par, at a discount, or at a premium.

4. Compute the price of the bonds as of their issue date.

5. Prepare the journal entry to record the bonds’ issuance

Question: Garcia Company issues 10%, 15-year bonds with a par value of $240,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 8%, which implies a selling price of 117¼. Prepare the journal entry for the issuance of these bonds. Assume the bonds are issued for cash on January 1, 2017

Question: Refer to the statements for Samsung in Appendix A. By what amount did Samsung’s long-term borrowings increase or decrease in 2015?

QuestionKey figures forAppleandGooglefollow.

Total assets . \(290,479 \)231,839 \(147,461 \)129,187

Total liabilities . 171,124 120,292 27,130 25,327

Total equity . 119,355 111,547 120,331 103,860

Required

1.Compute the debt-to-equity ratios for Apple and Google for both the current year and the prior year.

2.Use the ratios you computed in part 1 to determine which company’s financing structure is least risky.Assume an industry average of 0.44 for debt-to-equity.

Refer to the bond details in Problem 10-4B.

Required

  1. Compute the total bond interest expense over the bonds’ life.
  2. Prepare an effective interest amortization table like the one in Exhibit 10B.2 for the bonds’ life.
  3. Prepare the journal entries to record the first two interest payments.
  4. Use the market rate at issuance to compute the present value of the remaining cash flows for these bonds as of December 31, 2019. Compare your answer with the amount shown on the amortization table as the balance for that date (from part 2) and explain your findings.
See all solutions

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