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.How much cash did Alpha receive when the bonds were sold?
A)$1,000,000
B)$1,124,622.60
C)$885,296
D)$950,386

Question

Quizplus · Accepted Answer

When bonds are issued at a market rate of interest higher than the coupon rate, they are issued at a discount. In this case, the market rate of 6% is higher than the bond's coupon rate of 5%, meaning Alpha Company would receive less than the face value of $1,000,000. The correct answer, $885,296, represents the present value of the bond's cash flows (interest payments and principal repayment) discounted at the market rate of interest (6%).

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