Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 59

For the following questions, circle the best response.

Kasap, Inc., has been authorized to issue $30 million of 14%, 20-year bonds payable. Interest will be paid on a semiannual basis on June 30 and December 31 each year. At the date the bonds were to be issued, the market rate of interest for this quality of bond was 14.7%. On the basis of these facts, it might be expected that

a. Kasap, Inc., will not be able to sell the bonds because it offers less interest than is paid on similar bonds in the market.

b. because of legal considerations, the bonds will be issued at par and investors will be paid the 14.7% market rate of interest.

c. the bonds will be issued at a discount.

d. the bonds will be issued at a premium.

e. based on the facts presented, the issue price is indeterminable.

Step 1 of 6

(a)

Company K will be able to sell 14% bonds when the market rate of interest is 14.7%. When bonds are issued at a rate lower than the market, they are referred to as discount bonds.