Page 600 - Accounting Principles (A Business Perspective)

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per interest period, which is found by dividing the annual rate by the number of times interest is paid per year. For
example, if the annual rate is 12 per cent, the semiannual rate would be 6 per cent.
Issuers usually quote bond prices as percentages of face value—100 means 100 per cent of face value, 97 means

97 per cent of face value, and 103 means 103 per cent of face value. For example, one hundred USD 1,000 face value
bonds issued at 103 have a price of USD 103,000. Regardless of the issue price, at maturity the issuer of the bonds
must pay the investor(s) the face value of the bonds.

Exhibit 119: Bond premiums and discounts

Bonds issued at face value The following example illustrates the specific steps in computing the price of
bonds. Assume Carr Company issues 12 per cent bonds with a USD 100,000 face value to yield 12 per cent. Dated

and issued on 2010 June 30, the bonds call for semiannual interest payments on June 30 and December 31 and
mature on 2013 June 30. The bonds would sell at face value because they offer 12 per cent and investors seek 12
49
per cent. Potential purchasers have no reason to offer a premium or demand a discount. One way to prove the
bonds would be sold at face value is by showing that their present value is USD 100,000:
Cash X Present value =Present
Flow Factor value
Principal of $100,000 due in six interest periods multiplied by
present value factor for 6% from Table A.3 of the Appendix $100,000 X 0.70496 =$70,496
(end of text)
Interest of $6,000 due at the end of six interest periods
multiplied 6,000 X 4.91732 =29,504
by present value factor for 6% from Table A.4 of the
Appendix (end of text)
Total price (present value) $100,000
According to this schedule, investors who seek an effective rate of 6 per cent per six-month period should pay
USD 100,000 for these bonds. Notice that the same number of interest periods and semiannual interest rates occur
in discounting both the principal and interest payments to their present values. The entry to record the sale of these
bonds on 2010 June 30, debits Cash and credits Bonds Payable for USD 100,000.

49 Bonds do not normally mature in such a short time; we use a three-year life for illustrative purposes only.

Accounting Principles: A Business Perspective 601 A Global Text