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Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of...

Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%.

Auerbach issued the bonds:

Multiple Choice

A. At par.

B. At a premium.

C. At a discount.

D. Cannot be determined from the given information.

Business   Accounting   
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Homework Answers

Answer #1

Correct option is C. At a discount.

For Knowijg whether the bond issue at discount we have to compute Current Market Value of Bond or Bond Value

Formulae for Same is

Bond Value = PV of Annual Coupon paid + Present value of Redemption / Face Value of Bond

Pv will be found by YTM ie Effective rate of Interest rate of Market

Bond Value = Counpon Interest × PVAF (6%,10yr) + Redemption Value × PVF (6%,10yr)

Where PVAF is Present Value annuity factor

And PV is present Value Factor

BV =( 300×4%)× 7.360087+ 300×0.558395

=$(88.321044+ 167.5185)

=$255839544

As the Market Price is lower then the face value , Bond is issued at discount

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