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On January 1, Duffy Enterprises issued $100,000 in bonds that mature in 10 years. The bonds were issued at 104. The bonds have a stated interest rate of 8%. The bonds pay interest once per year on December 31. What is the carrying value of the bonds on the date of issue?

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secko

Answer:

104 dollars

Explanation:

Bond's carrying value is the net value calculated as face value plus any un-amortized premium or minus any amortized discount. It is usually referred to as the book value of bond. Bonds could be sold at face value, but if that's not the case they are sold with premium or discount, depending on the difference between current and stated interest rates. If the bond's interest rate is above market interest rate, it sells with premium, otherwise it sells with discount. In order to calculate carrying value, we must now:

  1. face value of bond or its par value
  2. bond's interest rate
  3. time to maturity

In our case, par value is 100, times to maturity is 10 years, interest rate of the bond is 8% and premium is 4, therefore its carrying value is 104 dollars.

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