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Bond Issuance and Amortization Analysis

The document presents a series of problems related to bond accounting for various companies, including journal entries, amortization tables, and calculations of interest expense and carrying amounts. Each problem specifies details such as bond face amounts, interest rates, issuance prices, and required calculations for effective interest amortization. The problems cover different scenarios including callable bonds, serial bonds, and bonds issued at a discount or premium.

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Ferryl Ken Ganhinhin
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6K views15 pages

Bond Issuance and Amortization Analysis

The document presents a series of problems related to bond accounting for various companies, including journal entries, amortization tables, and calculations of interest expense and carrying amounts. Each problem specifies details such as bond face amounts, interest rates, issuance prices, and required calculations for effective interest amortization. The problems cover different scenarios including callable bonds, serial bonds, and bonds issued at a discount or premium.

Uploaded by

Ferryl Ken Ganhinhin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Problem 6-1 (IAA)

Yellow Company received permission on January 1, 2024 to issue 12% bonds


payable with face amount of P6,000,000 maturing on December 31, 2033.

Interest is payable annually on December 31. The bonds are callable at 102 plus
accrued interest.

On January 1, 2024, the entity issued the bonds payable for P6,737,000 with an
effective yield of 10%.

The fiscal year of the entity ends December 31. The effective interest amortization
is used.

Required:
1. Prepare journal entries relating to the bonds payable for 2024.
2. Present the bonds payable on December 31, 2024.

Problem 6-2 (IAA)

On January 1, 2024, Orange Company was authorized to issue 6% bonds payable


with face amount of P5,000,000 maturing. On December 31, 2025. Interest is
payable semiannually on June 30 and December 31.

On January 1, 2024, the entity issued all of the bonds payable for P4,818,500 with
an effective rate of 8%.

The fiscal year of the entity is the calendar year and the effective interest method
of amortization is used.

Required:
1. Prepare a table of amortization for the discount on bonds payable.
2. Prepare journal entries for 2024 and 2026.

Problem 6-3 (IAA)

On January 1, 2024, Bishop Company issued 10% bonds payable with a face
amount of P20,000,000. The bonds mature on December 31, 2033.​

For bonds payable of similar risk and maturity, the market yield is 12%. Interest is
paid semiannually on June 30 and December 31.
The PV of 1 at 6% for 20 periods is 0.31 and the PV of an ordinary annuity of 1 at
6% for 20 periods is 11.47.

Required:
1. Determine the market price of the bonds payable onJanuary 1, 2024.
2. Prepare journal entries for 2024.

Problem 6-4 (IAA)

On January 1, 2024, Mania Company issued 12% bonds payable with face amount
of P20,000,000. The bonds mature on December 31, 2033.

For bonds payable of similar risk and maturity, the market yield is 10%. Interest is
paid semiannually on June 30 and December 31.

The PV of 1 at 5% for 20 periods is 0.377 and the PV of an ordinary annuity of 1 for


20 periods is 12.46.

Required:
1. Determine the market price of the bonds payable on January 1, 2024.
2. Prepare journal entries for 2024.

Problem 6-5 (ACP)

On January 1, 2021, Surigao Company issued bonds payable with face amount of
P4,000,000 and stated interest rate of 12%. The interest is payable semiannually
on June 30 and December 31.

The bonds mature on every December 31 at the rate of P2,000,000 per year for 2
years starting December 31, 2024. The prevailing market rate for the bonds
payable-is 8%.

Present value of 1 at 4%:


One period ​ ​ ​ ​ ​ 0.9615
Two periods ​​ ​ ​ ​ 0.9246
Three periods​ ​ ​ ​ ​ 0.8990
Four periods​​ ​ ​ ​ 0.8548

Required:
1. Determine the market price of the bonds payable on January 1, 2024.
2. Prepare a table of amortization using the effective interest method.
3. Prepare journal entries for 2021 and 2025.
Problem 6-6 (IAA)

On March 1, 2024, White Company issued 10% bonds payable with face amount of
P7,000,000 to yield 8%. Interest is payable semiannually on March 1 and
September 1. The bonds mature in 10 years. The entity follows the calendar year.
PV of 1 at 5% for 20 periods​ ​ ​ ​ ​ .377
PV of 1 at 4% for 20 periods​ ​ ​ ​ ​ .456
PV of an ordinary annuity of 1 at 5% for 20 periods​​ 12.462
PV of an ordinary annuity of 1 at 4% for 20 periods​​ 13.590

Required:
1. Determine the market price of the bonds payable.
2. Prepare an effective interest amortization table for the first two interest periods.
3. Prepare journal entries for 2024.

Problem 6-7 (IAA)

On June 1, 2024, Java Company issued 10%. bonds payable with face amount of
P6,000,000 to yield 12%.

Interest is payable annually on June 1 of each year. The bonds mature is B years.
The entity follows calendar year.

PV of 1 at 10% for 5 periods​ ​ ​ ​ ​ .62


PV of 1 at 12% for 5 periods​ ​ ​ ​ ​ .57
PV of an ordinary annuity of 1 at 10% for 5 periods​​ 3.79
PV of an ordinary annuity of 1 at 12% for 5 periods​​ 3.60

Required:
1. Determine the market price of the bonds payable.
2. Prepare an effective interest amortization table for the first two interest periods.
3. Prepare journal entries for 2024 and 2025.

Problem 6-8 (IA)

On January 1, 2024, Dumaguete Company issued bonds payable with face amount
of P6,000,000 with 8% effective yield. The nominal rate of 6% is payable annually
on December 31.

The bonds mature on every December 31 each year at the rate of P2,000,000 for
three years.
Present value of 1 at 8%
One period​ ​ ​ ​ ​ 0.93
Two periods​ ​ ​ ​ ​ 0.86
Three periods​ ​ ​ ​ ​ 0.79

Required:
1. Determine the market price or issue price of the bonds payable.
2. Prepare journal entries for 2024. The effective interest method of amortization is
used.
3. Determine the carrying amount of the bonds payable on December 31, 2024.

Problem 6-9 (IAA)

On January 1, 2021, Marsh Company issued 10% bonds payable with, face amount
of P6,000,00%. The bonds mature on January 1, 2034. The bonds were issued for
P5,316,000 to yield 12%, resulting in bond discount of P684,000.

The entity used the effective interest method of amortizing discount on bonds
payable. Interest is payable semiannually on June 30 and December 31.

For the six months ended June 30, 2024, what amount should be reported as bond
interest expense?

a.​ 300,000
b.​ 318,960
c.​ 334,200
d.​ 341,040

Problem 6-10 (IAA)

On July 1, 2024, Tara Company issued 4,000 8% bonds payable with P1,000 face
amount for P3,504,000. The bonds were issued to yield 10%. The bonds mature on
July 1, 2034.
Interest is payable semiannually on January 1 and July 1.

What amount of discount on bonds payable should be amortized for the six months
ended December 31, 2024?

a.​ 30,400
b.​ 24,800
c.​ 19,840
d.​ 15,200

Problem 6-11 (IAA)

On January 1, 2024, Sun Company issued 10% bonds payable with face amount of
P4,500,000. The bonds mature on January 1, 2034. The bonds were issued for
P3,987,000 to yield 12%, resulting in bond discount of P513,000.

The entity used the effective interest method of amortizing bond discount. Interest
is payable semiannually on January 1 and July 1.

For the six months ended June 30, 2024, what amount should be reported as bond
interest expense?

a.​ 225,000
b.​ 239,220
c.​ 250,650
d.​ 255,780

Problem 6-12 (AICPA Adapted)

On January 1, 2024, Ward Company issued 9% bonds payable with face amount of
P4,000,000,
which mature on January 1, 2034.

The bonds were issued for P3,756,000 to yield 10%, resulting in bond discount of
P244,000.
The entity used the interest method of amortizing discount on bonds payable.
Interest is payable annually on December 31.

1. On December 31, 2024, what amount should be reported as discount on bonds


payable?

a.​ 228,400
b.​ 208,000
c.​ 206,440
d.​ 204,000

2. What is the carrying amount of bonds payable on December 31, 2024?

a.​ 3,756,000
b.​ 4,000,000
c.​ 3,771,600
d.​ 3,740,400

Problem 6-13 (AICPA Adapted)

On January 1, 2024, Wolf Company issued 10% bonds payable with face amount of
P5,000,000, which mature on January 1, 2034.

The bonds were issued for P5,675,000 to yield 8%, resulting in bond premium of
P675,000.
The entity used the interest method of amortizing premium on bonds payable.
Interest is payable annually on December 31.

1. On December 31, 2024, what amount should be reported as premium on bonds


payable?
a.​ 675,000
b.​ 629,000
c.​ 607,500
d.​ 507,500
2. What is the carrying amount of bonds payable on December 31, 2024?
a.​ 5,000,000
b.​ 5,629,000
c.​ 4,371,000
d.​ 5,675,000

Problem 6-14 (AICPA Adapted)

Webb Company had outstanding 7%, 10-year P5,000,000 face amount bonds
payable. The bonds were originally sold to yield 6% annual interest. The entity used
the effective interest method to amortize bond premium.

On January 1, 2024, the carrying amount of the outstanding bonds payable was
P5,250,000.

1. What amount should be reported as premium on bonds payable on December 31,


2024?
a.​ 225,000
b.​ 172,500
c.​ 215,000
d.​ 52,500
2. What is the carrying amount of bonds payable on December 31, 2024?
a.​ 5,250,000
b.​ 4,785,000
c.​ 5,215,000
d.​ 5,000,000

Problem 6-15 (AICPA Adapted)

On January 1, 2024, West Company issued 9% bonds payable with face amount of
5,000,000 which mature on January 1, 2034. The bonds were issued for 4,695,000
to yield 10%.

Interest is payable annually on December 31. The entity used the interest method.

1. What amount should be reported as interest expense for 2024?


a.​ 450,000
b.​ 469,500
c.​ 422,550
d.​ 500,000
2. What is the carrying amount of the bonds payable on December 31, 2024?
a.​ 4,695,000
b.​ 4,704,750
c.​ 4,714,500
d.​ 5,000,000

Problem 6-16 (AICPA Adapted)

On January 1, 2024, Carrow Company issued 10% bonds payable with face amount
of P5,000,000 which mature on December 31, 2033. The bonds were issued for P
4,430,000 to yield 12%, resulting in bond discount of P570,000.

The entity used the interest method. Interest is payable semiannually on June 30
and December 31.

1. What amount should be reported as interest expense for 2024?


a. 532,548
b. 500,000
с. 531,600
d. 443,000
2. What is the carrying amount of the bonds payable on December 31, 2024?
a.4,430,000
b. 4,461,600
с. 4,462,548
d. 5,000,000

Problem 6-17 (IFRS)

On January 1, 2024, Bontoc Company issued P5,000,000, 8% serial bonds payable


to be repaid in the amount of P1,000,000 each year. Interest is payable annually on
December 31. The bonds were issued to yield 10% a year.

The bonds were issued for P4,757,000 based on the present value at January 1,
2024 of five annual payments. The entity amortized the discount on bonds payable
using the interest method.

On December 31, 2024, what is the carrying amount of the bonds payable?
a.​ 4,832,700
b.​ 3,832,700
c.​ 4,805, 600
d.​ 3,805,600

Problem 6-18 (AICPA Adapted)

On January 1, 2024, Arrow Company issued 10% bonds payable with face amount
of P5,000,000 that mature on December 31, 2028.

The bonds were issued for P4,632,000 to yield 12%, resulting in bond discount of
P368,000. The entity used the interest method of amortizing bond discount.
Interest is payable on June 30 and December 31.

For the year ended December 31, 2024, what amount should be reported as bond
interest expense?
a.557,515
b.500,000
c.250,000
d. 555,840

Problem 6-19 (IAA)


On January 1, 2024, Nixon Company reported 10% bonds payable with carrying
amount of P5,700,000. The bonds had a face amount of P6,000,000 and were
issued to yield 12%.

The interest method of amortization is used. Interest was paid on January 1 and
July 1 of each [Link] July 1, 2024, the entity retired the bonds payable at 102.
The interest payment on July 1, 2024 was made as scheduled.

1. What is the carrying amount of the bonds payable on July 1, 2024?


a. 5,700,000
b. 5,742,000
c. 6,000,000
d. 5,658,000

2. What amount should be recorded as loss on the early extinguishment of the


bonds payable?
a. 120,000
b. 378,000
c. 336,000
d. 462,000

Problem 6-20 (IAA)

On January 1, 2024, Moon Company reported 9% bonds payable of P4,000,000 less


discount on bonds payable of P320,000.

These bonds were issued to yield 10%. The effective interest method is used.
Semiannual interest was paid on January 1 and July 1 of each year.

On July 1, 2024, the entity retired the bonds payable at 103 before maturity.
What amount should be reported as loss on retirement of the bonds payable on July
1, 2024?
a. 436,000
b. 440,000
c. 432,000
d. 120,000

Problem 6-21 (AICPA Adapted)

On January 1, 2024, Angel Company issued 5-year 5,000 bonds payable with face
amount of P1,000 per bond for P5,380,000 to yield 10%. Interest of 12% is payable
annually every December 31.

On June 30, 2025, the entity retired 2,000 bonds at 96 plus accrued interest. The
entity used the interest method.

1. What amount should be recognized as gain or loss on retirement of bonds


payable on June 30, 2025?
a. 193,560 gain
b. 193,560 loss
c. 179,920 gain
d. 179,920 loss
2. What is the carrying amount of the remaining bonds payable on December 31,
2025?
a. 3,228,000
b. 3,190,000
c. 3,149,880
d. 3,129,420

Problem 6-22 (AICPA Adapted)

At the beginning of current year, Margaret Company provided the following


information in relation to the issuance of bonds payable:

Face amount​​ ​ ​ ​ ​ ​ ​ ​ ₱5,000,000


Term​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Ten years
Stated interest rate​ ​ ​ ​ ​ ​ ​ ​ 6%
Interest payment date​ ​ ​ ​ ​ ​ Annually on December 31
Yield​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 9%

​ ​ ​ ​ ​ ​ ​ ​ At 6%​ ​ At 9%
Present Value of 1 for 10 periods​ ​ ​ 0.558​​ ​ 0.422
Future Value of 1 for 10 periods​​ ​ ​ 1.791​​ ​ 2.367
Present Value of an ordinary annuity of ​ ​ 7.360​​ ​ 6.418
1 for 10 periods

What amount should be reported as the issue price of the bonds payable?

a.​ 5,000,000
b.​ 4,318,000
c.​ 4,035,400
d.​ 2,110,000

Problem 6-23

On December 31, 2024, Dome Company issued P4,000,000, 8% serial bonds


payable, to be repaid in the amount of P800,000 each year. Interest is payable
annually on December 31. The bonds were issued to yield 10% a year.
The bond proceeds totaled P3,805,600 based on the present value on December
31, 2024 of five annual payments.

Due Date​ ​ Principal​ ​ Interest​ ​ Present value on


12/31/24

12/31/2025​ ​ 800,000​ ​ 320,000​ ​ 1,018,000


12/31/2026 ​ 800,000​ ​ 256,000​ ​ 872,200
12/31/2027 ​ 800,000​ ​ 192,000​ ​ 745,000
12/31/2028 ​ 800,000​ ​ 128,000​ ​ 633,800
12/31/2029 800,000 64,000 536,600
​ ​ ​ ​ ​ ​ ​ ​ ​ 3,805,600

What is the carrying amount of the bonds payable on December 31, 2025?
a.​ 3,005,600
b.​ 3,066,160
c.​ 2,982,000
d.​ 2,787,600

Problem 6-24 Multiple choice (IAA)


1. What is the interest rate written on the face of the bond?
a. Coupon rate
b. Nominal rate
c. Stated rate
d. Coupon rate, nominal rate or stated rate

2. What is the rate of interest actually incurred?


a. Market rate
b. Yield rate
c. Effective rate
d. Market, yield or effective rate

3. When the effective interest method is used, the periodic amortization would
a. Increase if the bonds were issued at a discount.
b. Decrease if the bonds were issued at a premium.
c. Increase if the bonds were issued at a premium.
d. Increase if the bonds were issued at either a discount or a premium.

4. When interest expense for the current year is more than interest paid, the bonds
were issued at
a. A discount
b. A premium
c. Face amount
d. Cannot be determined

5. When interest expense for the current year is less than interest paid, the bonds
were issued at
a. A discount
b. A premium
c. Face amount
d. Cannot be determined

6. When bonds are sold at a premium and the effective interest method is used, at
each subsequent interest payment date, the cash paid is
a. Less than the effective interest
b. Equal to the effective interest
Greater than. the effective interest
d. More than if the bonds had been sold at a discount

7. When bonds are sold at a discount and the effective interest method is used, at
each subsequent interest payment date, the cash paid is
a. More than the effective interest
b. Less than the effective interest
c. Equal to the effective interest
d. More than if the bonds had been sold at a premium

8. When bonds are sold at a discount and the effective interest method is used, at
each interest payment date, the interest expense
a. Increases
b. Decreases
c. Remains the same
d. Is equal to the change in carrying amount

9. When bonds are sold at a premium and the effective interest method is used, at
each interest payment date, the interest expense
a. Remains constant
b. 1s equal to the change in carrying amount
c. Increases
d. Decreases

10. The effective interest expense is


a. The effective rate times the carrying amount of the bond payable at the
beginning of the interest period.
6. The stated rate times the face amount of the bond.
c. The effective rate times the face amount of the bond.
d. The stated interest rate times the carrying amount of the bond payable at the
beginning of interest period.

Problem 6-25 Multiple choice (AICPA Adapted)

1. What is the effective interest rate of a bond measured at amortized cost?


a. The stated rate of the bond.
b. The interest rate currently charged by the entity or by others for similar bond.
c. The interest rate that exactly discounts estimated future cash payments through
the expected life of the bond to the net carrying amount of the bond.
d. The basic risk-free interest rate that is derived from observable government bond
prices.

2. For a bond issue which sells for less than face amount, the market rate of
interest is
a. Dependent on rate stated on the bond
b. Equal to rate stated on the bond
[Link] than rate stated on the bond
d. Higher than rate stated on the bond

3. What is the market rate of interest for a bond issue which sells for more than
face amount?
a. Less than rate stated on the bond
b. Equal to rate stated on the bond
c. Higher than rate stated on the bond
d. Independent of rate stated on the bond

4. If bonds are issued at a premium, this indicates that


a. The yield rate exceeds the nominal rate
b. The nominal rate exceeds the yield rate
c. The yield and nominal rates coincide
d. No necessary relationship exists between the two rates

5. Which statement is true for bonds payable maturing on a single date when the
effective interest method of amortizing discount on bonds payable is used?
a. Interest expense as a percentage of the bond carrying amount varies from period
to period
b. Interest expense increases each six-month period
[Link] expense remains constant each six-month period
d. Nominal interest rate exceeds effective interest rate
6. In theory, the proceeds from the issuance of bonds payable shall be equal to
a. The face amount of the bonds payable.
b. The present value of the principal due at the end of the life of the bonds payable
plus the present value of the interest payments made during the life of the bonds
payable.
c. The face amount of the bonds payable plus the present value of the interest
payments made during the life of the bonds payable.
d. The sum of the face amount of the bonds payable and the periodic interest
payments.

7. The market price of bonds payable issued at a discount is the present value of
the principal amount at the market rate of interest
a. Less the present value of all future interest payments at the market rate of
interest.
b. Less the present value of all future interest payments at the rate of interest
stated on the bonds.
C. Plus the present value of all future interest payments at the market rate of
interest.
d. Plus the present value of all future interest payments at the rate of interest
stated on the bonds.

8. Under international accounting standard, the valuation method used for bonds
payable is
a. Historical cost
b. Discounted cash flow valuation at current yield rate
С. Maturity amount
d. Discounted cash flow valuation at yield rate at issuance

9. How should an entity calculate the net proceeds from issuance of bonds payable?
a. Discount the bonds payable at the stated rate of interest.
b. Discount the bonds payable at the market rate of interest.
c. Discount the bonds payable at the stated rate of interest and deduct bond
issuance cost.
d. Discount the bonds payable at the market rate of interest and deduct bond
issuance cost.

10. An entity issued bonds payable with a stated rate of interest that is less than
the effective interest rate. The bonds were issued on one of the interest payment
dates.
What should the entity report on the first interest payment date?
a. An interest expense that is less than the cash payment made to bondholders.
b. An interest expense that is greater than the cash payment made to bondholders.
c. A debit to discount on bond payable.
d. A debit to premium on bond payable.

Common questions

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Using the effective interest method impacts bond-related financial metrics by creating a dynamic between interest expense, carrying amount, and amortization. For Sun Company, this method results in interest expense based on a percentage of the carrying value, which changes each period as the discount is amortized. This affects reported profits by aligning interest expense with cash flows and market conditions, ensuring that reported expenses more accurately reflect the time value of money and economic benefits derived from the bonds, unlike the static approach of the straight-line method .

When Nixon Company retired its bonds on July 1, 2024, the bonds were bought back at 102, causing a loss on early retirement due to the premium paid over carrying value. This situation illustrates how market conditions, including current interest rates versus rates at issuance, can impact bond valuation and retirement costs. The carrying amount at retirement reflected amortization under the effective interest method, which was less than the buyback cost, leading to a financial loss. The decision to retire at a premium reflects Nixon's assessment of the prevailing market conditions being more favorable to repurchase than ongoing interest payments .

Market conditions play a crucial role in early bond retirement decisions by impacting financial strategy regarding benefits versus costs. Arrow Company's decision to retire bonds at 103 before maturity reflects an evaluation of prevailing interest rates and bond prices relative to returns from alternative investments. The loss recognized upon early retirement results from the premium paid over carrying value, indicating a costly strategy that could nevertheless be justified by future interest savings and potential reinvestment opportunities perceived under current market dynamics .

Margaret Company's bond issue price is determined by calculating the present value of future cash flows (interest payments and principal repayment) using the yield rate rather than the coupon rate. Specifically, the issuance price involves discounting both the face value of the bond and the annuity of interest payments by the yield rate. For Margaret Company, this calculation involves using the present value factors for 10 periods, showing a lower price due to the higher yield rate. By using the yield rate of 9% rather than the 6% stated rate, this aligns the issuance price with current market expectations .

Yield to maturity (YTM) represents the total return expected on a bond if held to maturity, differing from the coupon rate, which is the interest the bond will actually pay annually. For Carrow Company, which issued bonds at a discount to yield 12% when the coupon rate was 10%, the YTM captures investor expectations of returns including adjustment for the initial purchase price. This contrasts with the fixed annual coupon payments based only on the bond's face value, aligning market expectations with the initial pricing and ongoing financial performance of the bonds .

West Company's choice of the interest method results in amortization amounts that coincide with the interest expense over time, as interest expense aligns with the effective interest rate applied to the carrying amount of the bonds. In contrast, under the straight-line method, equal amortization and interest expense increments would lead to less precise matching of expenses with the economic benefits received each period. The effective interest method provides a more accurate representation of the expense pattern over the bond's life, impacting reported earnings and showing variability in expenses reflecting the changing carrying value .

The carrying amount of bonds is affected by the chosen amortization method, impacting financial statement presentation over time. Ward Company used the interest method to amortize the bond discount, which results in varying amortization amounts each period depending on the bond's carrying amount. The effective interest method leads to a smoother amortization curve and a carrying amount that reflects the present value of remaining cash flows discounted at the market rate. Ward Company's approach under this method shows how the carrying amount increases gradually as the discount decreases due to amortization, aligning with the bond's effective interest rate rather than the nominal rate .

Serial bonds like those issued by Bontoc Company affect financial statements by having portions of the principal repayable over several years, impacting both liquidity and interest expense reporting. The bonds were issued below face value, which required recording an initial discount and subsequent periodic amortization. This method results in a decreasing carrying value and impacts both the balance sheet and income statement as the principal repaid reduces the bond liability and the periodic interest expense reported reflects a decreasing outstanding bond balance due to the interest method used .

The key factors for determining bond interest expense using the effective interest method include the carrying amount of the bonds and the yield to maturity (the effective interest rate). For Tara Company, which issued 8% bonds with a P1,000 face amount for P3,504,000, yielding 10%, the effective interest would increase the reported interest expense compared to the stated rate. The discount on the bond is amortized over time, impacting the carrying amount and associated interest expense. For the period ending December 31, 2024, the amortization of the bond discount and the calculated effective interest rate determine the bond interest expense .

When the market yield exceeds the nominal interest rate, as in Wolf Company's bond issuance, the bonds are usually issued at a discount. This is because investors require a higher rate of return than the coupon rate, reducing the present value and thus the issuance price of the bonds. For Wolf Company, issuing bonds to yield an 8% market rate when the nominal rate was 10% demonstrates this principle, as the bonds were sold for less than face value, reflecting a bond discount .

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