Citywide Company issues bends with a par value of $82,000 on their stated issue

Question

Citywide Company issues bends with a par value of $82,000 on their stated issue date. The bonds mature in ten years and pay 8% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 6%. What is the amount of each semiannual interest payment for these bonds? How many semiannual merest 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. At a discount At par at a premium. Compute the price of the bonds as of their issue date. (Round Intermediate calculations to the nearest dollar amount.) Prepare the journal entry to record the bonds' issuance. (Round Intermediate calculations to the nearest dollar amount.)

Explanation / Answer

1. Amount of each semi annual interest payment = $82000 * 8% * 1/2 = $3280

2. The bond matures in 10 years.

Number of payments per year = 2

Total number of payment = 10 * 2 = 20

3. Issue price of bond = C * [1-1/(1+r)^n) / r] + M/(1+r)^n

r = market rate

n = number of periods

C = coupon paymnet

Issue price of bond = 3280 * [1-1/(1+.03)^20) / .03] + 82000/(1+.03)^20

= 48798 + 45401 = $94199 approx

As evident above, bond is issued at premium.

4. Price of bond as calculated above is $94199

5. Cash Dr $94199

To Bond Payable $82000

To Premium on issue of bond $12199

(Being bond issued at a premium of $12199)

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