Citywide Company issues bonds with a par value of $150,000 on their stated issue

Question

Citywide Company issues bonds with a par value of $150,000 on their stated issue date. The bonds mature in five years and pay 10% annual interest in semiannual payments. On the issue date, the annual market rate for the bonds is 8%. 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 4. Compute the price of the bonds as of their issue date. 5. Prepare the journal entry to record the bonds' issuance.

Explanation / Answer

1) Semi annual interest payment = 150000*10%*1/2 = 7500

2) Total semi annual interest paymeent to be made = 5*2 = 10

3) Coupon rate = 10%

Market interest rate = 8%

Bond is to be issued at premium because coupon rate is higher than market interest rate.

4) Semi annual coupon amount = 150000*10%*1/2 = 7500

Semi annual Market interest rate = 8%/2 = 4%

Total 6 months periods = 2*5 = 10

Par value = 150000

Price of Bond = 7500*Present value annuity factor(4%,10) + 150000*Present value interest factor(4%,10)

= 7500*9.11 + 150000*0.6755

= 68325 + 101325 = 169650

5)

Journal:

Cash Dr 169650

Bond Payable Cr 150000

Premium on issue of Bond Cr 19650

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