Question

To increase available capital, Bengal issued 1,000 bonds with a stated interest rate of 5% and face value of $10,000 per bond. The bonds will make monthly interest payments at the end of each month and mature in 5 years. The market rate of interest for similar bonds at the time of issuance was 6%. Calculate the bond issuance price, and record the sale/issuance of all 1,000 bonds.

Record the first interest payment made on the bonds issued in transaction.

Answer 1

The bond issuance price can be calculated using the following formula:

Bond Issuance Price = (Interest Payment / Discount Rate) * [1 - 1 / (1 + Discount Rate / Payment Frequency)^(Number of Payments / Payment Frequency)] + Face Value / (1 + Discount Rate / Payment Frequency)^(Number of Payments / Payment Frequency)

Where:
- Interest Payment = Face Value * Stated Interest Rate / Payment Frequency
- Discount Rate = Market Interest Rate / Payment Frequency
- Payment Frequency = 12 (since monthly payments are made)
- Number of Payments = Payment Frequency * Number of Years to Maturity = 12 * 5 = 60

Substituting the given values into the formula, we get:

Interest Payment = $10,000 * 5% / 12 = $416.67
Discount Rate = 6% / 12 = 0.5%
Bond Issuance Price = ($416.67 / 0.5%) * [1 - 1 / (1 + 0.5%)^(60)] + $10,000 / (1 + 0.5%)^(60) = $8,557.95

Therefore, the bond issuance price is $8,557.95, and the sale/issuance of all 1,000 bonds would generate $8,557.95 * 1,000 = $8,557,950 in cash.

Assuming the first interest payment is made at the end of the first month after the bond issuance, the amount of the first interest payment would be $10,000 * 5% / 12 = $416.67.

Answer 2

Answer: To calculate the bond issuance price, we can use the present value formula:

PV = FV / (1 + r/n)^(n*t)

where PV is the present value of the bond, FV is the face value of the bond, r is the annual interest rate, n is the number of compounding periods per year, and t is the number of years until maturity.

In this case, FV = $10,000, r = 6%, n = 12 (since the interest payments are monthly), and t = 5 years. We can solve for PV:

PV = $10,000 / (1 + 0.06/12)^(12*5) = $8,530.46

So the bond issuance price is $8,530.46 per bond.

To record the sale/issuance of all 1,000 bonds, we would debit Cash for $8,530,460 and credit Bonds Payable for $10,000,000, and the difference of $1,469,540 would be credited to the Discount on Bonds Payable account.

To record the first interest payment made on the bonds issued, we would debit Interest Expense for $42,652.30 (which is 1/12 of the annual interest rate of 5% multiplied by the face value of $10,000,000) and credit Cash for $83,333.33 (which is 1/12 of the face value of $10,000,000 multiplied by the annual interest rate of 5%).

Step-by-step explanation: