What is the purpose of a bond discount? It raises the bond interest rate to the market interest rate at the time the bond was issued.
What is the purpose of a bond discount?
Bond discount is the amount by which the market price of a bond is lower than its principal amount due at maturity. A bond issued at a discount has its market price below the face value, creating a capital appreciation upon maturity since the higher face value is paid when the bond matures.
When a bond is selling at a discount quizlet?
A bond will sell at a discount when the market, or effective, rate of interest is higher than the stated rate of interest on the bond. In contrast, when the market or effective rate of interest is lower than the stated rate, the bond will sell at a premium.
When a bond is issued at a discount the semiannual amount of interest expense will be greater than the cash payment for interest?
T/F: When a bond is issued at a discount, the semiannual amount of interest expense will be greater than the cash payment for interest. True, because interest expense includes both cash interest and amortization of the discount.
What is a discount bond quizlet?
discount bond. a bond that sells for less than its face value. premium bond. a bond that sells for more than its face value.
What is a pure discount bond?
Pure discount bond. A bond that will make only one payment of principal and interest. Also called a zero-coupon bond or a single-payment bond.
How is a bond valued?
Bond valuation, in effect, is calculating the present value of a bond’s expected future coupon payments. The theoretical fair value of a bond is calculated by discounting the future value of its coupon payments by an appropriate discount rate.
When a bond is sold at premium then?
If a bond is trading at a premium, this simply means it is selling for more than its face value.
Which is a disadvantage of bonds?
The disadvantages of bonds include rising interest rates, market volatility and credit risk. Bond prices rise when rates fall and fall when rates rise. … Credit risk means that issuers could default on their interest and principal repayment obligations if they run into cash-flow problems.
When a bond is sold at premium?
A bond that’s trading at a premium means that its price is trading at a premium or higher than the face value of the bond. For example, a bond that was issued at a face value of $1,000 might trade at $1,050 or a $50 premium. Even though the bond has yet to reach maturity, it can trade in the secondary market.
When a bond is issued at a discount the interest expense will be?
The present value of the bond’s face amount plus the present value of its periodic interest payments. if bonds are issued at a discount, over the life of the bonds, interest expense will: Decrease.
Which type of account is a bond discount?
The account Discount on Bonds Payable (or Bond Discount or Unamortized Bond Discount) is a contra liability account since it will have a debit balance. Discount on Bonds Payable will always appear on the balance sheet with the account Bonds Payable.
When a bond is issued at a discount the cash interest payment will?
when a bond is issued at a discount, the semiannual amount of interest expense equals the cash payment for interest because when a bond is issued at a discount, the market rate is lower than the contract (stated) rate, because interest expense includes both cash interest and amortization of the discount.
What is the point of a zero coupon bond?
Zero coupon bonds are bonds that do not pay interest during the life of the bonds. Instead, investors buy zero coupon bonds at a deep discount from their face value, which is the amount the investor will receive when the bond “matures” or comes due.
What is the interest rate of a bond called?
The stated interest rate of a bond payable is also known as the face interest rate, the nominal interest rate, the contractual interest rate, and the coupon interest rate. Generally, a bond’s stated interest rate is fixed (remains constant) for the life of the bond.
What is the face value of a bond quizlet?
Also known as the face value of the bond, the par value is the sum of money that the corporation promises to pay at the bond’s expiration. The coupon rate is the interest rate of the bond and is also known as the coupon yield.