Relationship between contract and market rate of interest

Reference no: EM131761190

Question: To raise money for a capital improvement to its national headquarters, JMP Inc. issued $2,000,000 in bonds on January 1, 2017.

Hint: you may use time value of money tables to solve this problem.

Assume the following:
	Amount of Bonds Issued	$2,000,000
	Face of Bond	$1,000
	Maturity date	20 years
	Contract rate of interest	5%
	Interest payments	Semi annual

Required: a) How many bonds were issued?

b) Prepare the journal entry to record the issuance of the bonds on January 1, 2017 assuming the bonds were issued at face.

c) Prepare the journal entry to record the issuance of the bonds on January 1, 2017 assuming the bonds:

Were issued at: 98

d) Prepare the journal entry to record the issuance of the bonds on January 1, 2017 assuming the bonds were issued at:

Were issued at: 104

e) Explain different approaches to amortizing bond discount and premium.

f) Identify the amortization method preferred by FASB and explain why it's preferred.

g) Assume 5 years have passed since the bonds were originally issued and they are now trading in the secondary market. How much would a seller be willing to sell for and a buyer be willing to pay for the bonds originally issued assuming the following:

Face amount of bonds sold: $100,000

Market rate of interest on investments of similar risk: 4%

h) Describe the relationship between the contract and market rate of interest with respect to how a differential between market and contract rates affects the selling price of bonds.

Reference no: EM131761190

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