Question

Exercise 10-8A Computing bond interest and price; recording bond issuance LO C2, P3

Citywide Company issues bonds with a par value of $65,000 on their stated issue date. The bonds mature in nine years and pay 10% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 8%. (Table B.1, Table B.2, Table B.3, and Table B.4) (Use appropriate factor(s) from the tables provided.)

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 select 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.

What is the amount of each semiannual interest payment for these bonds?
How many semiannual interest payments will be made on these bonds over their life?
Use the interest rates given to select whether the bonds are issued at par, at a discount, or at a premium.

Par (maturity) value		Semiannual Rate		Semiannual cash interest payment
			=
Number of payments
Whether the bonds are issued at par, at a discount, or at a premium?

Compute the price of the bonds as of their issue date. (Round intermediate calculations to the nearest dollar amount.)

Table Values are Based on:
n =
i =
Cash Flow	Table Value		Amount		Present Value
Par (maturity) value
Interest (annuity)
Price of bonds					$0

Note: Enter debits before credits.

Transaction	General Journal	Debit	Credit
1

Answer 1

Amount of each semiannual interest payment for these bonds = Face value * coupon rate / 2

= 65000 * 10% * 0.5

=$3250

No of semiannual interest payments which will be made on these bonds over their life = Years till maturity * 2

= 9 * 2 = 18

The coupon rate is 10% and the market yield is 8% which is less than the coupon rate. The price of the bond is at the premium being the market yield less than the coupon rate

Cash Flow	Table Value	Amount	Present Value
Par (maturity) value	65000	65000	32085.83
Interest (annuity)	3250	58500	41142.72
Price of bonds			$73,229

Price of the bond = Face value + Coupons [ 1 - ( 1 + r) ^-n ] / r

r = yield on market

n = no of semiannual period

Price of the bond = 65000 / 1.04^18 + 3250 [ 1 - ( 1.04)^-18 ] / 0.04