Problem: ABC corp. issued a 3 and a half year, 4%, $100,000 of par value bonds on January 1, 2016.
The 3-year treasury bond interest rate is 3.25%.
The 4-year treasury bond interest rate is 3%
Additional information: 3-year Interest rates for the following:
1 - AAA bonds. 3.75%
2 - AA bonds. 4%
3 - A bonds 4.25%
Additional information: 4-year Interest rates for the following:
1 - AAA bonds. 3.50%
2 - AA bonds. 3.55%
3 - A bonds 3.90%
ABC was rated as AAA last year but has since been downgrades to an A rated bond this year.
Problem 1: What is the market rate of the 3 1/2-year ABC bond? Explain and show all work and calculations.
Problem 2: Present the journal entry for the issuance of the bonds on January 1, 2016. Shown your work as to how the value of the bonds was calculated.
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