Bond Valuation – Short Answer

Practice Question

Intro to Financial Accounting
Non-Current Liabilities
Bond Issuance and Valuation
Short Answer

A company issued bonds for $1,000,000 with a coupon rate of 5% when the market rate was 6%. If the bonds pay interest annually, what will be the bond premium or discount? Calculate the present value of the bond if the market rate is used.

Answer +
Bond Discount: $60,000
Explanation +

Since the coupon rate (5%) is lower than the market rate (6%), the bond will be issued at a discount.

Step 1: Calculate annual interest payment: $1,000,000 × 5% = $50,000.

Step 2: Use present value formulas to compute total bond value:
- PV of annuity (interest payments) + PV of lump sum (face value at maturity).

Assuming the calculated present value using market rate factors is $940,000, then:
- Bond Discount = $1,000,000 - $940,000 = $60,000.

Understanding how bond pricing works using market rates is critical to properly recording liabilities and interest expense over time.