Question

1. What happens to the prices of bonds as the market rate of interest increases?

1. Doubles
2. Decreases
3. Increases
4. Stays the same

2. Why do long-term bonds typically have higher coupon rates shorter-term bonds?

1. They have a higher rate of return.
2. They are a lower tax risk.
3. More investors want to buy them.
4. They are riskier investments.

Entries for Issuing Bonds

Thomson Co. produces and distributes semiconductors for use by computer manufacturers. Thomson Co. issued $270,000 of 20-year, 7% bonds on May 1 of the current year at face value, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year.

May 1	Issued the bonds for cash at their face amount.
Nov. 1	Paid the interest on the bonds.
Dec. 31	Recorded accrued interest for two months.

Journalize the entries to record the above-selected transactions for the current year. Round your answers to the whole number.

May 1
Nov. 1
Dec. 31

Answer 1

answers :

1.) b) Decreases

2) d) They are Riskier Investments

1) If the Market interest Rates Increases the Price of the Bond will reduce since the yield on the bond will Reduce.

2) Long-term Bonds are a Riskier investment than the Short term investment so they offer a higher coupon rate than Short run bonds