BU127 Lecture Notes - Lecture 17: Zero-Coupon Bond, Interest Expense, Market Rate
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BU127 Full Course Notes
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Bonds that do not pay periodic interest. Because there is no interest annuity: pv of principal = issue price of the bond. On 01/01/2017, firm issues ,000 in bonds on rate of 10% annually. Mature in 10 years, interest is paid semi-annually, market rate is 8% annually. Since bond rate > market interest rate, the bond is issued at a premium. Principal value = fv / (1+i)^n = 100000 / (1+0. 04)^20 = ,640. Annuity pv = (p/i) * (1 1/(1+i)^n) = (5000/0. 08) * (1- 1/(1+0. 04)^20)) = ,952 price. = pv principal + pv annuity = ,640+,952 = ,592. Premium on bonds payable (+l) bonds payable (+l) First coupon payment journal entry (for first interest expense, repeat for each payment period) Interest expense = carrying amount * market rate * time = ,592 * 8% * 6/12 = . Interest expense = (113592 456) * 4% = . Interest expense (+e, -se) premium on bonds payable (-l)
