S11-3 Determiningbondprices[5min] Bond prices depend on the market rate of inter

Question

S11-3 Determiningbondprices[5min] Bond prices depend on the market rate of interest, stated rate of interest, and time. Requirement 1.Determine whether the following bonds payable will be issued at maturity value, at a premium, or at a discount: 2 The market interest rate is 6%. Boise issues bonds payable with a stated rate of 5 3/4%. Dallas issued 8% bonds payable when the market rate was 7 1/4%. Cleveland’s Cables issued 7% bonds when the market interest rate was 7%. Atlanta’s Travel issued bonds payable that pay stated interest of 7 1/2%. At issuance, the market interest rate was 9 1/4%. a. b. c. d.

Explanation / Answer

a) The market interest rate is 6%. Boise issues bonds payable with a stated rate of 5 3/4%

Since Coupon rate is lower than market interest rate Bond is trading at discount

b) Dallas issued 8% bonds payable when the market rate was 7 1/4%

Since Coupon rate is greater than market interest rate Bond is trading at premium

c) Cleveland’s Cables issued 7% bonds when the market interest rate was 7%

Since Coupon rate is equal to market interest rate Bond is trading at par i.e maturity value

d) Atlanta’s Travel issued bonds payable that pay stated interest of 7 1/2%. At issuance, the market interest rate was 9 1/4%.

Since Coupon rate is lower than market interest rate Bond is trading at discount

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