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Since call features are considered a disadvantage to the investor, callable bonds with longer maturities usually pay a rate at least a quarter-point higher than comparable non-callable issues. The bondholders receive $6,000 ($100,000 x .06) every 6 months when comparable investments were yielding only 10% and paying $5,000 ($100,000 x .05) every 6 months. Co. received cash for $206,948 on bond issued with a par value of $200,000. is the rate that is identified in the bond indenture. That means the bond's coupon rate is greater than the rate available in the market. Since bonds are an attractive investment, the price was bidded up to $107,722, and the premium of $7,722 is considered a reduction of interest expense. You may also want to compare the cost of selling a bond at more than one brokerage firm. Investopedia does not include all offers available in the marketplace. Ex: If its coupon rate, which is fixed and printed on the face of the bond, is less than market rates, then the investor is offered a discount to get him/her to buy! The bond is issued at a premium in order to create an immediate capital gain for the issuer. Because the coupon payments from a bond that sells at a premium are larger than the coupon payments from a bond that sells at par, bonds that sell at a premium depend more on reinvestment income than bonds that sell at par. The company chose to create a premium account, rather than write off the difference in Cash Flows over the life of the bond since it would like to maintain its financial leverage. Carry value= 400,000 bond payable less 3,800 amortization discount. Acct chapter 10 Flashcards | Quizlet As with any investment, bonds have risks. In return, the investor would like periodic annual payments and the total amount returned in the future. You'll also learn the advantages and disadvantages of each. A company received cash of &306,948 on a bond with PV of 300,000. Interest is the cost of borrowing money from the investor. Ex: Callable bonds often pay a higher coupon rate (i.e. If an issuer sells bonds at a premium: Multiple Choice The carrying value increases from the par value to the issue price over the bond's term. \end{matrix} The carrying value of the bond stays constant over time. If you haven't yet covered the present value concept, you can skip straight ahead to the next section. If the bond is issued at a premium, the amortization of the premium is subtracted from the face value. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature. Based on those annual payments, sometimes an investor is willing to purchase the bond at a discount, an amount less than the borrowed amount, or they may purchase the bond at a premium, an amount greater than the borrowed amount.