The state of Illinois issues zero coupon bonds as part of its Illinois College Savings Bonds series. This bond series had different maturity dates and the different maturities led to very different prices. Suppose that in late 2012, the state issued 9,000 such bonds with a total $90 million maturity value. Each bond had a maturity value of $10,000, and bonds ranged in price from $9,500 for a 3-year bond to $5,219 for an 11-year bond. Consider one of the 11-year zero coupon bonds issued on December 31, 2012, for $5,219. To maintain consistency with other bond yields that we work with, assume that the interest rate is compounded semiannually.
1. Compute the market interest rates for the 11-year zero coupon bond.
2. Is this higher or lower than the rate on the 3-year bonds? You can answer this question by asking what the price of the 3-year bond would be at exactly the 11-year rate and comparing that number with the actual sales price.
3. Prepare the state’s journal entry for one 11-year bond at issuance. Do not use a discount account.
4. Prepare the state’s journal entry for recording interest expense on the 11-year bonds for the first 6 months of 2013. Round to the nearest dollar.
5. Compute the liability that Illinois would show on its balance sheet for this bond on June 30, 2013.