Exhibit 14-4 A $300, 000, ten-year, 6% bond issue was sold to yield 7% interest payable annually.Actuarial information for 10 periods is as follows:
$\begin{array}{lll}
&6\%&7\%\
\text { Present value of } 1 & .558 & .508 \
\text { Present value of an anmuity of } 1 & 7.360 & 7.024
\end{array}$

-Refer to Exhibit 14-4.The discount at the date of bond issuance would be

Question

Exhibit 14-4 A $300, 000, ten-year, 6% bond issue was sold to yield 7% interest payable annually.Actuarial information for 10 periods is as follows:
$\begin{array}{lll}
&6\%&7\%\
\text { Present value of } 1 & .558 & .508 \
\text { Present value of an anmuity of } 1 & 7.360 & 7.024
\end{array}$
 
-Refer to Exhibit 14-4.The discount at the date of bond issuance would be

Quizplus · Accepted Answer

The discount on the bond issuance is calculated by comparing the present value of the bond's cash flows (interest and principal) at the market rate of interest (7%) with its face value. The interest payments are $300,000 * 6% = $18,000 annually. Using the present value of an annuity factor for 7% (7.024), the present value of the interest payments is $18,000 * 7.024 = $126,432. The present value of the principal ($300,000) at the end of 10 years at 7% is $300,000 * .508 = $152,400. The total present value of the bond is $126,432 (interest) + $152,400 (principal) = $278,832. The discount is the difference between the face value ($300,000) and this amount, which is $300,000 - $278,832 = $21,168.