Question

On September 30, 2024, Techno Corporation issued 8% stated rate bonds with a face amount of $500 million. The bonds mature on September 30, 2044 (20 years). The market rate of interest on the date of issue was 9%.

What is the amount of bond discount or premium that Techno Corporation recorded on the date of issue?
a. Bond discount of $50 million
b. Bond premium of $50 million
c. Bond discount of $40 million
d. Bond premium of $40 million

Answer 1

On the date of issue, Techno Corporation recorded a (c) bond discount of $40 million.

Step-by-step explanation:

The bond discount is calculated by finding the difference between the stated rate (8%) and the market rate (9%) at the time of issuance. In this case, the market rate is higher than the stated rate, resulting in a discount to make the bonds more attractive to investors. The $40 million bond discount represents the present value of the future cash flows discounted at the market rate over the 20-year period until maturity.

Issuers often experience bond discounts when market interest rates exceed the stated rate, reflecting the market's demand for higher returns. This discount is an accounting adjustment that spreads the total interest expense over the life of the bonds.