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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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On January 1, 2019, Bay Company issues bonds with a face value of $850,000 that pay 9% interest semiannually and mature in 15 years. The market interest rate at the date of issuance is 8%. What is the issue price of the bond?

  1. a. $850,000.00
  2. b. $923,491.41
  3. c. $815,386.52
  4. d. $567,656.32

To determine

State the issue price of bonds.

Explanation

Bonds:

Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.

Justification for the correct option b:

Calculate the issuing price of the bond:

ParticularsAmount
Present value of principal ($850,000×0.308319) $262,071.15
Present value of interest payments (38,250(3)×17.292033) $661,420.26
Issuing price $ 923,491.41

Table (1)

Note: 0.308319 is present value of $1 (where, n=30 (2), i =4 % (1)), 17.292033 is the present value of annuity (where, n=30 (2), i =4% (1))

Working notes:

(1)Calculate the effective interest rate per semiannual period:

Effectiveinterestratepersemi-annualperiod}=Semiannualinterestrate2Periods=8%2periods= </

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