Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 10 Liabilities 451

is 7.36009. Thus, the present value of the preceding $6,000 per year annuity using the

present value of an annuity of $1 for 10 periods at 6% is calculated as follows:

You should note that using the present value of an annuity of $1 table yields the same

present value, $44,160.54, as our prior computation that calculated present values of

each annual receipt of $6,000. In addition, you should note that the sum of the present

value of $1 factorsfrom the previous calculation and illustrated in Exhibit 9, 7.36009,

equals the present value annuity of $1 factor.

Bonds Issued at Face Value

We now use the preceding present value concepts in determining the issue price of a

bond. When a corporation issues bonds, the price that buyers are willing to pay for the

bonds depends upon the following three factors:

1. The face amount of the bonds, which is the amount due at the maturity date.


2. The periodic interest to be paid on the bonds.


3. The market rate of interest.

The face amount and the periodic interest to be paid on the bonds are identified in the

bond indenture. The periodic interest is expressed as a percentage of the face amount

of the bond. This percentage or rate of interest is called the contract rate, or coupon

rate. The market rateor effective rate of interest is determined by transactions between

buyers and sellers of similar bonds. This is the rate of return that investors demand for

bonds of a similar quality and duration. The market rate is affected by a variety of fac-

tors such as investors’ assessment of current economic conditions and the company’s

credit quality.

If the contract rate of interest equals the market rate of interest, the bonds will sell

at their face amount. If the market rate is higherthan the contract rate, the bonds will

Periods 5% 51 – 2 %6%6^1 – 2 % 7% 10% 11% 12% 13% 14%

1 0.95238 0.94787 0.94340 0.93897 0.93458 0.90909 0.90090 0.89286 0.88496 0.87719

2 1.85941 1.84632 1.83339 1.82063 1.80802 1.73554 1.71252 1.69005 1.66810 1.64666

3 2.72325 2.69793 2.67301 2.64848 2.62432 2.48685 2.44371 2.40183 2.36115 2.32163

4 3.54595 3.50515 3.46511 3.42580 3.38721 3.16987 3.10245 3.03735 2.97447 2.91371

5 4.32948 4.27028 4.21236 4.15568 4.10020 3.79079 3.69590 3.60478 3.51723 3.43308

6 5.07569 4.99553 4.91732 4.84101 4.76654 4.35526 4.23054 4.11141 3.99755 3.88867

7 5.78637 5.68297 5.58238 5.48452 5.38929 4.86842 4.71220 4.56376 4.42261 4.28830

8 6.46321 6.33457 6.20979 6.08875 5.97130 5.33493 5.14612 4.96764 4.79677 4.63886

9 7.10782 6.95220 6.80169 6.65610 6.51523 5.75902 5.53705 5.32825 5.13166 4.94637

10 7.72174 7.53763 7.36009 7.18883 7.02358 6.14457 5.88923 5.65022 5.42624 5.21612

Exhibit 9

Present Value of an Annuity of $1

Present Value



Cash Flow or



Present Value of an

of the Annuity Annuity Payment Annuity of $16%, 10

$44,160.54*  $6,000  7.36009

* Because the present value tables are rounded to five decimal places,

minor rounding differences may appear in the illustrations.