Acme Corporation issued $650,000, 8%, bonds for $720,000. Was the market rate on the date of issue higher than, lower than, or equal to the stated rate of interest?
To determine whether the market rate on the date of issuance was higher, lower, or equal to the stated rate of interest, you need to compare the amount of money Acme Corporation received from issuing the bonds ($720,000) to the face value of the bonds ($650,000).
Here's how you can calculate this:
1. Calculate the premium or discount: Subtract the face value of the bonds from the amount of money the company received from issuing the bonds.
$720,000 - $650,000 = $70,000
2. Calculate the premium or discount as a percentage of the face value.
$70,000 / $650,000 ≈ 0.1077 (rounded to four decimal places)
0.1077 x 100 ≈ 10.77% (rounded to two decimal places)
Based on the calculations, the premium on the bonds is approximately 10.77%. Since the premium is positive, it indicates that Acme Corporation received more money than the face value of the bonds. This suggests that the market rate on the date of issue was lower than the stated rate of interest.
Therefore, the market rate on the date of issuance was lower than the stated rate of interest.