Question

On January 2, 20X1, Meister Company issues $200,000 of 6% bonds. Interest of $6,000 is payable semi-annually on June 30 and December 31. The bonds mature in 5 years. The market yield for bonds of similar risk and maturity is 7%. Utilizing the time value of money tables in your book, calculate the issue price of the bonds (round the result to whole dollars).

Answer 1

January 2, 20x1, bonds issues at a discount

Dr Cash 191,600

Dr Discount on bonds payable 8,400

Cr Bonds payable 200,000

Step-by-step explanation:

the bonds' current market value = PV of face value + PV of coupon payments

The bond has a 6 percent coupon rate, matures in 5 years (10 semiannual periods), and the market rate is 7%:

PV of face value = $1,000 / (1 + 3.5%)¹⁰ = $708.92

PV of coupon payments = 30 x 8.31661 (PV annuity factor, 3.5%, 10 periods) = $249.50

bond's market value = $958.42 ≈ $958 x 200 bonds = $191,600