Chung Inc. issued \$50,000 of 3-year bonds on January 1, 2018, with a stated rate of 4% and a market rate of 4%. The bonds paid interest semi-annually on June 30 and Dec. 31. How much money did the company receive when the bonds were issued? The bonds would be quoted at what rate?

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Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685

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Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 13, Problem 4EB
Textbook Problem
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Chung Inc. issued \$50,000 of 3-year bonds on January 1, 2018, with a stated rate of 4% and a market rate of 4%. The bonds paid interest semi-annually on June 30 and Dec. 31. How much money did the company receive when the bonds were issued? The bonds would be quoted at what rate?

To determine

Concept introduction:

Bonds:

are defined as debt instruments which are usually issued by the company that borrows to its lenders. They are issued at a rate of interest that is specified and for a specified period of time. The bondholders receive a fixed rate of interest on the bonds and the repayment of the bonds is made at the maturity date.

To calculate:

The receipts from issuance from bonds and quoted rate.

Explanation of Solution

The receipts from issuance from bonds and quoted rate are calculated as follows:

 Bonds Par value (A) \$ 50,000 Interest rate (B) 4% Semiannual interest payment (C) = A×B/2 = \$ 1,000 Semiannual market rate at the time of issuance of bonds (4%/2) = 2% Number of semiannual interest payments (2 years ×2) = 4 Present value of \$ 1 annuity (D) (2%, 4 periods) 3...

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