Q4SE_2 - 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

2. All bonds pay the same at maturity of the bonds.

Step 1: Definition of maturity period

The time period over which bonds remain effective and bondholder receive interest is known as maturity period.

Step 2: Band that pays most to retire at maturity

Bonds are generally redeemable at par value if nothing special given, therefore Country Telecom has to pay $100,000 at maturity for all bonds. Hence all bonds have the same maturity value.