Question

A company constructs a building for its own use. construction began on january 1 and ended on december 30. the expenditures for construction were as follows: january 1, $500,000; march 31, $600,000; june 30, $400,000; october 30, $600,000. to help finance construction, the company arranged a 7% construction loan on january 1 for $700,000. the company’s other borrowings, outstanding for the whole year, consisted of a $3 million loan and a $5 million note with interest rates of 8% and 6%, respectively.

Answer 1

When considering the purchase of a bond with a lower interest rate than the current market rate, the bond's price will be discounted to reflect a yield comparable to the new market rate. A $10,000 ten-year bond at 6% is less attractive when the market rate is 9%, and therefore it will be priced lower to ensure the yield aligns with current rates.

Step-by-step explanation:

When considering the purchase of a bond one year before its maturity, it is important to understand the implications of the prevailing interest rates. If the original bond was issued at a 6% interest rate and you are now considering buying it when the market interest rate is 9%, the bond's price is likely to be lower than its face value. This is because new bonds in the market offer a higher return due to the increased interest rates, making the older bond with a lower interest rate less attractive unless it is discounted.

In the context of a $10,000 bond purchased near the end of its term, the interest income is fixed based on the original 6% rate. However, the market value of the bond will fluctuate to reflect the new 9% market rate. In essence, you would be willing to pay less for the bond now compared to the face value, so that the overall yield (interest payments plus gain at maturity) aligns with the current 9% market rate.