Question

plans to issue $300,000 of 10-year bonds paying a 5% interest rate, with interest payable annually. The discount rate for such securities is 4%. How much can the company expect to receive from the sale of the bonds?

Answer 1

Answer:

$324,333

Explanation:

the market price per bond:

PV of face value = $1,000 / (1 + 4%)¹⁰ = $675.56

PV of coupon payments = $50 x 8.1109 (PV annuity factor, 4%, 10 periods) = $405.55

market price per bond = $1,081.11

total issuance of the bonds = $1,081.11 x 300 = $324,333

the journal entry to record issuance of bonds:

Dr Cash 324,333

    Cr Bonds payable 300,000

    Cr Premium on bonds payable 24,333