On January 1, 2020, Nichols Company issued for $1,085,800 its 20-year, 11% bonds that have a maturity
Question:
a The present value of $1,000,000 due at the end of 40 (6-month) periods at the yield rate of 5% per period.
b The present value of $55,000 per period for 40 (6-month) periods at the yield rate of 5% per period.
Instructions
a. Discuss the conceptual merit(s) of each of the date-of-issue statement of financial position presentations shown above for these bonds.
b. Explain why investors would pay $1,085,800 for bonds that have a maturity value of only $1,000,000.
c. Assuming that a discount rate is needed to compute the carrying value of the obligations arising from a bond issue at any date during the life of the bonds, discuss the conceptual merit(s) of using for this purpose:
1. The coupon or nominal rate.
2. The effective or yield rate at date of issue.
d. If the obligations arising from these bonds are to be carried at their present value computed by means of the current market rate of interest, how would the bond valuation at dates subsequent to the date of issue be affected by an increase or a decrease in the market rate of interest?
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
Step by Step Answer:
Intermediate Accounting IFRS
ISBN: 978-1119372936
3rd edition
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield