Question

Record retirement of the callable bonds at 101% of face value on September 30 when the bonds had a carrying value of $990,000 and a face value of $1,000,000.

a. Gain on retirement, $10,000
b. Loss on retirement, $10,000
c. Gain on retirement, $1,000,000
d. Loss on retirement, $1,000,000

Answer 1

When interest rates rise, the value of bonds with lower interest rates decreases. Hence, the bond would be priced lower than $10,000.

Step-by-step explanation:

When interest rates rise, the value of existing bonds with lower interest rates decreases. In this case, the bond has a coupon rate of 8%, which is lower than the current interest rate of 12%. As a result, the bond's market price will be lower than its face value of $1,000. To induce investors to buy the bond, the seller will lower its price below $1,000.

Given the change in interest rates, one would expect to pay less than $10,000 for the bond.