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    pwalter's Avatar
    pwalter Posts: 1, Reputation: 1
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    #1

    Nov 11, 2008, 08:19 PM
    Bonds, interest expense
    Hi! I have an exam tomorrow and I was wondering if anyone could answer this question about bonds.

    Stein Corporation sold a $1000 bond on January 1, 2009. Interest rate of 6% payable at the end of each year. The bond matures at the end of 2011 and was sold at a market rate of 8% per year.

    How do you find the issue price and the amount of interest expense that should be shown each year?

    Thanks so much.
    hamzashakaa's Avatar
    hamzashakaa Posts: 161, Reputation: 8
    Junior Member
    		  
    #2

    Nov 12, 2008, 12:32 AM

    Because the stated interest rate is less than the market rate the bond must be issued at a discount.
    First of all you should multiply the principal of the bond (1000) by the present value factor of $1 for 2 years. Then you should multiply the annual interest paid (60) by the present value of annuity for two years.
    then you sum the present value of the principal and the interest payments to get the price of the bond
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