Question

Bonds with a stated interest rate of 9% and a face value totaling $616,000 were issued for $640,640 on January 1, 2021, when the market interest rate was 8%. The company uses effective-interest bond amortization. What can be said about this bond issuance?

Answer 1

Bonds with a stated interest rate of 9% and a face value totaling $616,000 were issued at a premium when the market interest rate was 8%.

Step-by-step explanation:

When the interest rate of a bond is less than the market interest rate, the bond's price will be less than its face value. In this case, the bond is issued with a stated interest rate of 9% while the market interest rate is 8%. This indicates that the bond is being issued at a premium. The bond's price can be calculated using the present value formula, which discounts the expected future payments. Using this formula, the bond's price will be less than $616,000.