On January 1,2011,Alpha Company issued $1,000,000 of 5%,20-year bonds to buy a new computerized accounting system.The market rate of interest was 6%.The bonds pay interest annually on December 31.To calculate the amount of cash that Alpha received,you must use a discount rate of ________.

Question

Quizplus · Accepted Answer

The market rate of interest for the bonds is given as 6%, which implies that the bonds were issued at a discount since the coupon rate is lower than the market rate. Therefore, the amount Alpha received would be less than the face value of the bonds. To calculate the amount of cash that Alpha received, we need to use the present value formula with the market rate of interest. Using a discount rate of 6%, we can calculate the present value of the bond to determine the cash received by Alpha. Thus, the correct choice is B) 6%.

On January 1,2011,Alpha Company Issued $1,000,000 of 5%,20-Year Bonds to Buy