When a bond is issued at a premium, it signifies that the bond is sold for a price higher than its face value. This usually indicates that the bond’s contract rate is higher than the current market rate. The difference between the bond’s face value and the sales price must be amortized during the bond’s term, much like a discount bond. Unlike a bond issued at a discount, however, the process of amortizing the premium reduces the bond’s interest expense recorded on the issuing company’s books. The issuing firm will still be responsible for paying the bondholder the promised interest payments.
When premium bonds are issued, the quizlet?
When a firm issues a bond at a discount, the interest expense will be greater than the annual interest paid. When bonds are issued at a premium, the interest expense is less than the interest paid on the bonds.
What does it indicate when a bond is sold at a discount or at a premium?
A premium bond is one that costs more than its face value, whereas a discount bond is one that costs less than its face value. Bonds with interest rates higher than current sell as a premium, while those with rates lower than current sell at a discount.
When should premium bonds be issued and when should discount bonds be issued?
Bonds are given a “face value,” or “par value,” when they are issued. This is the amount that the investor receives when the bond matures. Bonds, like stocks, trade on the open market from the time they are issued until they mature. As a result, as the market’s ups and downs dictate, their prices can increase above or fall below par. A bond having a $1,000 par value that sells for $1,100 is considered a premium. A bond trading at a discount is one whose price falls to $900. A bond that is traded at face value is said to be “at par.”
What happens to the carrying value of bonds issued at a premium?
The carrying value of a bond issued at a premium is more than the bond’s face value. A bond’s carrying value is less than its face value when it is issued at a discount. When a bond is issued at par, its carrying value is the same as the bond’s face value.
What is the bond discount quizlet when bonds are issued at a discount?
The semiannual amount of interest expenditure will be more than the cash payment for interest when a bond is issued at a discount. because interest expenditure is made up of both cash interest and discount amortization
When a bond sells at a premium, what does it mean?
A bond that is trading at a premium is one whose price is greater than or equal to the bond’s face value. A bond with a face value of $1,000, for example, might trade at $1,050, or a $50 premium. The bond can trade in the secondary market even if it hasn’t reached maturity. In other words, before the bond matures in ten years, investors can purchase and sell it. If the bond is held until maturity, the investor receives the face value, which in this case is $1,000.
When bonds are issued at a premium, is the face amount credited to the bonds payable account?
When bonds are sold at a discount, the face amount is applied to the bonds payable account. A debenture bond is a type of mortgage bond. The process of approximating interest rates is known as imputation, and the resultant interest rate is known as an imputed interest rate.
Key Points
- Because there is usually no premium or discount connected with the selling of a bond issued at par value, recording it is a simple operation.
- Debit the amount paid to the bond interest expense account and credit the same amount to the cash account to record interest paid on a bond issued at par value.
- Record any final interest payments after the bond is paid off. The full face value of the bonds should then be debited from the bond payable account and credited to the cash account.
Key Terms
- The stated value or amount on a bill, note, stamp, etc. is referred to as par value.
- Stock with a defined value in the company charter below which shares of that class cannot be sold at the initial public offering.
- Shares issued by a corporation with no minimum price for which they must be sold are known as no-par value stock.
Are all bonds issued at par?
Bonds aren’t always sold for their face value. Depending on the level of interest rates in the economy, they could be granted at a premium or at a discount. A bond that is trading at a premium is said to be trading at a premium, whereas a bond that is trading at a discount is said to be trading at a discount. A higher proportion of bonds will trade over par or at a premium during periods when interest rates are low or have been going lower. When interest rates are high, a greater percentage of bonds trade at a discount. A bond with a face value of $1,000 that is now trading at $1,020 is said to be trading at a premium, whilst a bond with a face value of $950 is said to be trading at a discount.
Quizlet: What does it mean to buy a bond at a premium?
What does it mean to trade at a premium? It signifies that the coupon rate on a bond is lower than the current interest rates.