Question

Cornerstone Exercise 9-35 Bonds Issued at a Premium (Effective Interest) Charger Battery issued $100,000 of 11%, seven-year bonds on December 31, 2022, for $104,868. Interest is paid annually on December 31. The market rate of interest is 10%. Required: Prepare the amortization table using the effective interest rate method. For those boxes in which no entry is required, leave the box blank. If the amount is zero, enter "0". If required, round your answers to the nearest whole dollar. Charger Battery Amortization Table Period Cash Payment (Credit) Interest Expense (Debit) Premium on Bonds Payable (Debit) Premium on Bonds Payable Balance (Credit) Bond Payable Carrying Value (Credit) At issue 12/31/23 12/31/24 12/31/25 12/31/26 12/31/27 12/31/28 12/31/29

Answer 1

A bond's present value is determined by the present value of its future cash flows, which are discounted at the market rate of interest. If the bond's interest rate equals the market rate, its price equals its face value. However, if the market rate rises above the bond's rate, the bond's price falls to provide a yield comparable to the current market rate.

Step-by-step explanation:

We are tasked with understanding how to calculate the present value of bond payments with different interest rates. Considering a two-year bond with a face value of $3,000 and an 8% interest rate, the bond will pay $240 in interest yearly. If the discount rate is also 8%, the bond's present value equals the sum of the present value of all future payments. However, if the market interest rate increases to 11%, the value of the bond would decrease.

To calculate these, we use the present value formula:

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• When the discount rate is 8%, the bond's price is the same as its face value because the coupon rate equals the market rate.
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• When the interest rates rise to 11%, the bond's price is calculated using a higher discount rate, which lowers the present value of its future cash flows.

Lastly, the bond's price must be considered if its interest rate is less than the market interest rate. With a 12% market rate, no rational investor would pay more for a bond's future cash flow than they could earn from an alternative investment with the same return. Therefore, the bond's price would adjust to ensure the yield matches the prevailing interest rates.