Determining Bond Premium or Discount Smith and Sons, Inc., decides to sell $1,000,000 in bonds to finance the construction of a new warehouse. The bonds will carry an annual coupon rate of interest of four percent, to be paid semiannually, and will mature in five years. (a) If the market rate of interest at the time of issuance is five percent, will the bonds sell at their face value, a discount, or a premium? (b) If the market rate of interest at the time of issuance is four percent, will the bonds sell at their face value, a discount, or a premium? (c) If the market rate of interest at the time of issuance is three percent, will the bonds sell at their face value, a discount, or a premium?
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
SE10-2 Determining Bond Premium or Discount
Smith and Sons, Inc., decides to sell $1,000,000 in bonds to finance the construction of a new warehouse. The bonds will carry an annual coupon rate of interest of four percent, to be paid semiannually, and will mature in five years. (a) If the market rate of interest at the time of issuance is five percent, will the bonds sell at their face value, a discount, or a premium? (b) If the market rate of interest at the time of issuance is four percent, will the bonds sell at their face value, a discount, or a premium? (c) If the market rate of interest at the time of issuance is three percent, will the bonds sell at their face value, a discount, or a premium?
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