Question

Hilton, Inc. has a $1,000 bond that is convertible into 10 shares of common stock (par value $10). At the time of conversion, the unamortized premium is $50. Required: Prepare the journal entry to record the bond conversion.

Answer 1

When interest rates increase, the value of a bond decreases. Use the formula to calculate the actual price you would be willing to pay for the bond.

Step-by-step explanation:

When interest rates change, the value of a bond can be affected. In this case, since interest rates have increased from 6% to 9%, you would expect to pay less than $10,000 for the bond. The reason is that with the higher market interest rate, the bond's fixed interest rate of 6% becomes less attractive.

To calculate the actual price you would be willing to pay for the bond, you can use the formula:

Bond Price = Coupon Payment / (1 + Market Interest Rate) + Coupon Payment / (1 + Market Interest Rate)^2 + ... + Coupon Payment / (1 + Market Interest Rate)^n + Face Value / (1 + Market Interest Rate)^n

In this case, you would calculate the present value of the bond's remaining cash flows (coupon payments) and the face value using the market interest rate of 9% and the remaining time to maturity.