Question

On january 1, year 1, pierce corporation issued $25,000 in 8%, 5-year bonds payable at 102. interest payments are due each december 31. pierce uses the straight-line method to amortize bond discounts and premiums. on january 1, year 2, pierce corporation called the bonds payable at a price of $25,450. which of the following shows the effect of this transaction on the elements of the financial statements? balance sheetincome statementstatement of cash flows assets=liabilities stockholders. equityrevenue−expenses=net income

a.(25,450)(25,400)(50)na50(50)(25,450)fa
b.(25,450)(25,400)(50)na50(50)(25,450)fa/(50)oa
c.(25,450)(25,450)nananana(25,450)fa
d.(25,450)nanana25,450(25,450)(25,450)oa

Answer 1

Valuing bonds involves discounting future payments to their present value using a discount rate, which is the market interest rate. If the market interest rate increases, the present value of a bond decreases. Investors will not pay more for a bond than its present value calculated at the current market interest rate.

Step-by-step explanation:

Valuing a bond requires understanding the present value of its future payments. If a two-year bond with an 8% interest rate is issued for $3,000, it will pay $240 in interest at the end of each year. To calculate the bond's present value with an 8% discount rate, we must discount each of these future payments back to their present value using the formula PV = FV / (1+r)^n, where FV is the future value, r is the discount rate, and n is the number of periods. If the market interest rate increases to 11%, the bond's value will decrease because future payments will be discounted at a higher rate. So, if interest rates rise, the present value of the bond's future payments must be recalculated using the new discount rate. The present value will be lower as the higher discount rate reduces the current worth of future cash flows.

In a scenario where the bond's interest rate is lower than the market interest rate, such as 12%, the price of the bond will be less than its face value. This is because investors could find alternative investments that yield the current market rate. Therefore, no rational investor would pay more than the price that equates the future payment to the present value at the current market interest rate.