Your Company Issues a 5-Year Bond with a Face Value

question 18

Multiple Choice

Your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%. The market interest rate is 5%. The issue price of the bond is calculated as :

• A) the value today of $10,000 received in 5 years plus $700 a year for 5 years.
• B) the face value of the bonds, $10,000.
• C) the amount investors would have to pay to earn 7% interest.
• D) the amount investors would have to pay to earn an average of the stated interest rate and the market interest

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Definitions:

Interest Payments

the regular payments made by a borrower to a lender, typically a percentage of the outstanding debt, as compensation for the loan or credit provided.

Deferred Gross Profit

The portion of gross profit that is not recognized in the current period due to installment sales or revenue recognition policies.

Installment Sales

The method of recognizing revenue where the payment is received over a period of time in installments, often used in real estate and high-priced consumer goods transactions.

Deduction

An expense that can be subtracted from gross income to reduce the amount of income subject to tax.