Question

On January​ 1, 2018​, Technicians Credit Union ​(TCU​) issued 7 %​, 20​-year bonds payable with face value of $ 700 comma 000. The bonds pay interest on June 30 and December 31. Read the requirementsLOADING.... Requirement 1. If the market interest rate is 5 % when TCU issues its​ bonds, will the bonds be priced at face​ value, at a​ premium, or at a​ discount? Explain. The 7 % bonds issued when the market interest rate is 5 % will be priced at ▼ a discount a premium face value . They are ▼ attractive unattractive in this​ market, so investors will pay ▼ face value less than face value more than face value to acquire them.

Answer 1

Answer:

1. If the market interest rate is 5 % when TCU issues its​ bonds, will the bonds be priced at face​ value, at a​ premium, or at a​ discount? Explain.

Since the market rate is lower than the coupon rate, the bonds will be sold at a premium. The issue price should be $875,719, which means that the bonds were sold at 125.1 and the following journal entry must be recorded:

Dr Cash 875,719

    Cr Bonds payable 700,000

    Cr Premium on bonds payable 175,719

The 7 % bonds issued when the market interest rate is 5 % will be priced at A PREMIUM. They are ATTRACTIVE in this​ market, so investors will pay MORE THAN FACE VALUE to acquire them.

Explanation:

issued $700,000 of 7%, 20 year bonds, pay semiannual coupons ($24,500 each)

issue price = present value of face value + present value of interest payments

• present value of face value = $700,000 / (1 + 2.5%)⁴⁰ = $260,701
• present value of annuity = $24,500 x {1 - [1 / (1 + 2.5%)⁴⁰]} / 3.5% = $615,018

issue price = $875,719