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1) Bonds are frequently issued at amounts greater or less than face value


1) Bonds are frequently issued at amounts greater or less than face value. Describe how the market interest rate, relative to the contractual interest rate, affects the selling price of bonds. Also explain the rationale for requiring an investor to pay accrued interest when a bond is purchased between interest payment dates.

2. When a bond sells at a discount, what is probably true about the market interest rate versus the stated interest rate?  Discuss.

3. Bonds may be redeemed (retired) before maturity by the issuing corporation. Explain why a company would decide to retire bonds before maturity and the necessary steps to record the redemption.

4. Kim Estes and Jeff Malone are discussing how the market price of a bond is determined. Kim believes that the market price of a bond is solely a function of the amount of the principal payment at the end of the term of a bond. Is she right? Discuss.

5. Megan Stone is discussing the advantages of the effective-interest method of bond amortization with her accounting staff. What do you think Megan is saying?

6. Hannah Company maintains two separate accounts payable computer systems. One is known to all the users, and is used to process payments to vendors. Employees enter the vendor code, or the name and address of new vendors, the amount, the account, and so on. The other system is a secret one. It is used to cross-check the vendors against an approved vendor list. If a vendor is not listed as approved, the payment process is halted. Internal audit employees seek to verify the existence of a bona fide claim by the vendor. All inquiries are made at the top management level, and very discreetly. No one but top management, the internal audit staff, and the Board of Directors of the company is even aware of the second system.


Is it ethical for a company to have a secret system like the one described? Explain.

7. Susan Kline works for Trend Press, a fairly large book publishing firm. Her best friend and rival, Lisa, works for Silver Books, a smaller publisher. Both companies issue $100,000 in bonds on July 1. Trend's bonds were issued at a discount, while Silver's were issued at a premium. Lisa sent Susan a fax the next day. She told Susan that it was obvious who the better publisher was—the market had shown its preference! She reminded Susan again of her recent increase in salary as further proof of the superiority of Silver Books.


Draft a short note for Susan to send to Lisa. Explain how such a result could occur.

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