[afowler1197]

Issued 4,000,000 of 30-year, 7% callable bonds with interest payable on jan. 1 and July 1. Journalize the transaction - called the bond issue at 96, the rate provided in the bond indentures. What does called the bond issue at 96 mean?

[rdrewd]

I'd be more comfortable answering this if I knew a time frame and the specifics of the bond we're talking about so I could double check that my answer was sensible. Bond prices are expressed on the basis of 100 being "par". That is, for a $1000 corporate bond, if the price is 100, the price of the $1000 bond is $1000. If the price is 96, the price of the $1000 bond is $960. Generally, if interest rates move up, the price of existing bonds goes down.

The classic reason for a company to call a callable bond is that if interest rates moved down, they can borrow some less expensive money (that is borrow at the lower interest rate) and pay off the old higher interest rate bonds to reduce their overall cost of money. (Analogous to your refinancing your home mortgage if interest rates have declined).

But I don't feel I've got enough information to give a tidy explanation of why the bond issuer was interested in paying off these particular callable bonds.

Are we talking about a zero coupon bond? A zero coupon bond initially sells at a discount, pays no periodic interest payments during the life of the loan, and pays the face amount at maturity. So, if interest rates held steady, you'd expect the price of the bond to rise from its initial discount towards "par". Zero coupon bonds can be callable and if called, you'd expect the price to be less than par. 96, perhaps. Ref: Invest FAQ: Bonds: Zero-Coupon

[morgaine300]

afowler, 96 just means 96% of the face value. 101 would be 101%. Etc.

[morgaine300]

Pst, rdrewd, I think you may have missed the point that these are homework problems. This isn't a real company. (The bonds were called because the problem said so. Etc.)