27. If the market rate of interest is at 13%, a $20,000 12% 10-year bond that pa
ID: 2407042 • Letter: 2
Question
27. If the market rate of interest is at 13%, a $20,000 12% 10-year bond that pays interest annually would most likely sell at an amount: A) equal to the face value of the bond. B) greater than the face value of the bond (i.e. at a premium). D) less than the face value of the bond (i.e. at a discount). Not enough information to draw a conclusion. 28. Football Enterprises issues 1,000 20-year, 690, $1,000 bonds to fund their new sports stadium on January 1, 2013 at 105. The bond premium recorded for this ansaction would be a: A S0, there is no bond premium on this transaction. B) $60,000 debit to Premium on Bonds Payable C) $60,000 credit to Premium on Bonds Payable D) $50,000 credit to Premium on Bonds PayableExplanation / Answer
Answers
When Bonds interest rate is LOWER than market interest rate, the bond becomes unattractive to investors because why would anyone will invest in securities with lower rate when he/she can earn at a higher rate by investing in the market at market rate.
It is because of this that to attract investors, the bonds are sold at a value LESS THAN Face Value, just to attract investors.
Hence, in the given question, the correct answer will be Option ‘C’ Bonds will sell than the face value of the bonds (at a discount)
This is because Market rate of 13% is more than Bonds Interest rate of 12%.
One bond is of $ 1,000
One bond is issued at 105 (105%)
One bond is issued at $ 1,000 x 105% = $ 1,050
Premium on 1 bond = $ 1050 - $1000 = $ 50
Total Bonds issued = 1000
Total Premium on Bonds payable = 1000 bonds x $ 50 premium per bond = $ 50,000
Premium on Bonds payable is CREDITED.
Hence, the correct answer will be Option ‘D’ % 50,000 credit to Premium on Bonds Payable.
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