Q4SE_1 - Horngren'S Financial And Managerial Accounting

Question

Bond prices depend on the market rate of interest, stated rate of interest, and time.

Requirements

1. Compute the price of the following 8% bonds of Country Telecom.

a. \(100,000 issued at 75.25

b. \)100,000 issued at 103.50

c. \(100,000 issued at 94.50

d. \)100,000 issued at 103.25

2. Which bond will Country Telecom have to pay the most to retire at maturity? Explain your answer.

Step-by-Step Solution

Answer

Answer:

(a) $75,250 (b) $103,500 (c) $94,500 (d) $103,250

Step 1: Definition of bonds

Bonds are the loans issued by the company to the investors on which regular interest payment are made by the company.

Step 2: Price of the bonds

a. In this case, the bonds are issued at a discount

$$\begin{gathered} PriceofBonds=Facevalueofbond\times rate \\ =\$100,000\times 75.25\% \\ =\$75,250 \end{gathered}$$

b. In this case, the bonds are issued at a premium

$$\begin{gathered} PriceofBonds=Facevalueofbond\times rate \\ =\$100,000\times 103.50\% \\ =\$103,500 \end{gathered}$$

c. In this case, the bonds are issued at a discount

$$\begin{gathered} PriceofBonds=Facevalueofbond\times rate \\ =\$100,000\times 94.50\% \\ =\$94,500 \end{gathered}$$

d. In this case, the bonds are issued at a premium

$$\begin{gathered} PriceofBonds=Facevalueofbond\times rate \\ =\$100,000\times 103.25\% \\ =\$103,250 \end{gathered}$$