Rationale behind discount bonds?
Discount bonds afford the investor the opportunity for capital gains. If for tax reasons the market is segmented on the demand side, investors in lower and lower tax brackets must be attracted when interest rates rise and the supply of discount bonds increases.
What is the purpose of a bond discount?
Bond discount is the amount by which the market price of a bond is lower than its principal amount due at maturity. A bond issued at a discount has its market price below the face value, creating a capital appreciation upon maturity since the higher face value is paid when the bond matures.
Why would anyone buy a discount bond?
Discount bonds can be attractive to investors who want to purchase bonds at a lower price. The discount price can help to offset lower yields associated with the bond. The deeper the discount, the higher the potential for gains from these bonds. And investors still benefit from regular interest payments.
Which one of the following is the reason that bonds may sell at a discount or premium?
A bond often trades at a premium or discount to its face value. this can happen when market interest rates rise or fall relative to the bond’s coupon rate. If the coupon rate is higher than market interest rates, for example, then the bond will likely trade at a premium.
What is the purpose of a bond discount quizlet?
The amortization of bond discount: reduces the carrying value of bonds payable on the balance sheet. results in bond interest expense being greater than the interest paid to bondholders. increases the cash paid to bondholders for interest.
Is it better to buy a bond at a discount or premium?
Discount bonds can be riskier but the lower the price, the higher the potential for gains. Premium bonds can deliver higher returns with less risk, but they can be problematic if they become callable.
Does discount bond pay interest?
A discount bond is a bond that is issued for less than its Par (or face) value, or a bond currently trading for less than its par value in the secondary Market. Discount Bonds are similar to zero-coupon bonds, which are also sold at a discount, but the difference is that the latter does not pay interest.
When bonds are issued at a discount what happens to the carrying value?
When a bond is issued at a premium, the carrying value is higher than the face value of the bond. When a bond is issued at a discount, the carrying value is less than the face value of the bond. When a bond is issued at par, the carrying value is equal to the face value of the bond.
When bonds are sold at a discount and the effective interest method is used?
At a discount. When bonds are sold at a discount and the effective interest method is used, at each subsequent interest payment date, the cash paid is: Less than the effective interest. A bond is issued with a face amount of $500,000 and a stated interest rate of 10%.
How do you account for bonds issued at a discount?
How do you record a bond issued at a discount? 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.
How would the amortization of discount on bonds payable affect the carrying amount of bond?
Amortization of a bond premium decreases interest expense and the carrying amount of the bond for the issuer, while the amortization of a bond discount increases the issuer’s interest expense and the carrying amount of the bond.
What is the effect of bond premium or discount and issue costs amortization on the interest expense to be recognized during the year?
The amount of the bond discount is amortized to interest expense over the bond’s life. As a bond’s book value increases, the amount of interest expense increases.
Why is there a need to amortize discount or premium?
Therefore, bond discounts or premiums have the effect of increasing or decreasing the interest expense on the bonds over their life. Under these conditions,it is necessary to amortize the discount or premium over the life of the bonds by using either the straight-line method or the effective interest method.
What best describes the discount on bonds payable account?
What is the Discount on Bonds Payable? The discount on bonds payable is the difference between the face amount of a bond and the reduced price at which it was sold by the issuer. This happens when investors need to earn a higher effective interest rate than the stated interest rate associated with a bond.
Why are bond discounts amortized?
Bond discount amortization also helps adjust the discounted bond carrying value over time. Because bonds sold at a discount will be repaid at their full face value, total bond discount is added back to arrive at the bond face value.
Why is discount on bonds payable a liability?
A contra liability account that reports the amount of unamortized discount associated with bonds that are outstanding. The discount on bonds payable originates when bonds are issued for less than the bond’s face or maturity amount.
Is discount on bonds 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.
What is the opposite of discount on bonds payable?
Definition of Premium or Discount on Bonds Payable
If the amount received is greater than the par value, the difference is known as the premium on bonds payable. If the amount received is less than the par value, the difference is known as the discount on bonds payable.