Jules issues 4.5%, five-year bonds dated January 1, 2009, with a $230,000 par value. The bonds...

Jules issues 4.5%, five-year bonds dated January 1, 2009, with a $230,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $235,160. The annual market rate is 4% on the issue date.

Is this bond trading at a discount or premium? Why? What does it mean to amortize a discount or premium?

Expert Solution

Answer :

1. Bond is trading at Premium of $ 35,160.

Premium is the value collected from the bond above the face value at the time of issue of the bond.

IF the Bond interest rate is More than the market interest rate.bond will be issued at a premium.

Face Value of the bond is $200,000 Issue Value is $ 235,160

Premium is = $235,160- $200,000 =$35,160 ( Premium)

2. Amortize a discount or Premium.

It is the process of allocating the discount or premium on bonds payables from the interest expenses and Bond costs from the bond over the lifetime of the bond.

The Main objective of the bond is the reduce the Premium and discount amount to Zero by the End of the life of the bond.

The Difference between the Bond interest expenses ( Which is Calculated on the carrying value of the bond with market interest rates.) and Cash interest paid ( On FAce value with Bond Interest rate)) is used to amortize the Discount and premium amount on bonds payable over the life.

ekkarill92 answered 2 years ago

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