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Tano Company issues bonds with a par value of $180,000 on January 1, 2019. The bonds' annual contract rate is 8%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 10%, and the bonds are sold for $170,862.1. What is the amount of the discount on these bonds at issuance

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anthougo

Answer:

Tano Company

The amount of the discount on these bonds at issuance is:

= $9,138.

Explanation:

a) Data and Calculations:

Face value of bonds issued = $180,000

Proceeds from sale of bonds    170,862

Discount on bonds =                    $9,138

Bonds' contract rate = 8%

Market rate on date of issuance = 10%

b) The bonds were issued at a value that is less than the face or par value.  This implies that there are discounts on the bonds, totaling $9,138.  This is the difference between the face value of the bonds and the actual proceeds received from the issuance of the bonds.  This also explains why the bonds are paying 8% interest when the prevailing market rate is 10%.  The discounts compensate the bondholders for the reduced interest rate by selling at a discount.

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