Question

JK Corporation issued a $700,000 of 3%, 10-year bonds on January 1, 20X2. Interest payable simiannually on June 30 and December 31. The bonds were issued for $642,730 to yeild an effective rate of 4%. What is the amount of discount should

Answer 1

JK Corporation

Amount of Discount should be:

$57,270

Step-by-step explanation:

a) Calculation:

Face Value = $700,000

Issue value = $642,730

Discount = $57,270

b) JK Corporation's bond is issued at a discount when the face value of this bond is more than the issue value. JK Corporation's bond can only be issued at a discount if the effective or market interest rate is more than the face or stated interest rate. It is the higher market interest rate of the JK Corporation's bond that attracts investors to neglect the low stated interest rate.