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Original issue date bond

Asked Dec 16, 2008, 10:59 AM — 1 Answer
A company issued a 10,000 8 % five yr bond on jan 1st 2008, the original issue date. What is the value of the bond if it is issued when the market rate of interest is 6%
I looked at the table and got this

10000*.7473=7473
800* 4.2124=33.70

7473+33.70=10843.......but I don't remember how I got the 4.2124 in class...can you help?

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pready Posts: 2,662, Reputation: 887
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Dec 18, 2008, 06:38 AM
This is a Bond that is sold at a premium. When are your payments

1st you need to figure out the Present value of your Interest. To do this you need to figure out the amount of the first interest payment.

Interest = Principal * Rate * Time. Use your 8%/# of payments in a year.

Then to compute your present value of your interest you use the Present Value of an ordinary annuity of $1 table to find the interest Factor. You will need to know your number of periods (Number of times payment are made in a year * # of years) and your Interest rate ( 6% / # times paymets in a year)

Next you Need to find the present value of your Prncipal. For this you use the Present value of $1 table to get your interest factor * your face amount of the bonds.

Then you add your 2 amounts (Present value of your interest and your principle). This is your Present value of your bonds.

Your journal entry will be:
Debit Cash for the Present value of your bonds
Credit Bonds Paybale for the Face amount of the bonds
Credit Premium on Bonds Payabler for the difference.
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