Stewart Research issues bonds dated Jan 1, 2011, that pay interest semiannually on June 30 and December 31. The bonds have a $12,000 par value and an annual contract rate of 10% and they mature in 10 years. The market rate at the date of issue is 8%
Please find the answer as follows:
Nper = 2*10 = 20 (indicates the period over which interest payments are made)
Rate = 8%/2 = 4% (indicates the rate of interest)
FV = 12000 (indicates the par value)
PMT = 12000*5% = 600 (indicates the interest payment)
PV = ? (indicates the issue price)
Issue Price = PV(Rate,Nper,PMT,FV) = PV(4%,20,600,12000) = 13630.84 or 13631
Cash Dr. 13631
Premium on Bonds Payable/Bonds Premium (13631-12000) Cr. 1631
Bonds Payable Cr. 12000
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