Bonds are sold at a discount when the market interest rate exceeds the coupon rate of the bond. To understand this concept, remember that a bond sold at par has a coupon rate equal to the market interest rate.
What would cause a bond to sell at a premium vs a discount?
A bond trades at a premium when its coupon rate is higher than prevailing interest rates. A bond trades at a discount when its coupon rate is lower than prevailing interest rates.
Under what conditions of bond issuance does a discount on bonds payable arise?
Conclusion. The discount on bonds generally arises when the bonds are issued at a coupon rate, which is less than the prevailing market interest rate (YTM) of the similar bonds. The discount should be charged to the income statement. read more of the issuer as an expense and amortized during the life of the bond.
What does it mean to sell a bond at a discount?
The bond discount is the difference by which a bond’s market price is lower than its face value. For example, a bond with a par value of $1,000 that is trading at $980 has a bond discount of $20. … Bonds are sold at a discount when the market interest rate exceeds the coupon rate of the bond.
What does the fact that a bond sells at a discount or at a premium tell you about the relationship between RD and the bond’s coupon rate?
When the terms premium and discount are used in reference to bonds, they are telling investors that the purchase price of the bond is either above or below its par value.
How should discount on bonds payable be reported on the financial statements premium on bonds payable?
Discount (premium) on bonds payable should be reported in the balance sheet as a direct deduction from (addition to) the face amount of the bond. Both are liability valuation accounts.
Is discount on bonds payable a current liability?
What Is a Discount on Bonds Payable? Discount on Bonds Payable is a contra liability account that is debited for the purpose of offsetting a credit on a liability account Bonds Payable and reporting the net book value, or carrying value, of an entity’s outstanding bonds.
How do you record discounts on bonds payable?
Accounting for Bond Amortization
If there was a discount on bonds payable, then the periodic entry is a debit to interest expense and a credit to discount on bonds payable; this has the effect of increasing the overall interest expense recorded by the issuer.
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.
A zero-coupon bond is a debt security instrument that does not pay interest. Zero-coupon bonds trade at deep discounts, offering full face value (par) profits at maturity. The difference between the purchase price of a zero-coupon bond and the par value indicates the investor’s return.
How do you amortize a bond discount?
The easiest way to account for an amortized bond is to use the straight-line method of amortization. Under this method of accounting, the bond discount that is amortized each year is equal over the life of the bond. Companies may also issue amortized bonds and use the effective-interest method.
Why do some bonds sell at a premium over par value and others sell at a discount to par value?
Explain why some bonds sell at a premium over par value while other bonds sell at a discount. … If the coupon rate is higher than the required return on a bond, the bond will sell at a premium, since it provides periodic income in the form of coupon payments in excess of that required by investors on other similar bonds.
When a bond is sold at a discount the cash received is less than the present value?
1) When a bond is sold at a discount, the cash received is less than the present value of the future cash flows from the bond based on the market rate of interest on the date of issue.
When a bond sells at a premium quizlet?
A bond sells at a premium when contract is higher than market. What does a premium accomplish? When selling a bond at premium the interest rises above the coupon rate. This causes the bond’s price to fall below its par value.