{"id":3946,"date":"2019-10-08T13:33:00","date_gmt":"2019-10-08T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=3946"},"modified":"2025-12-07T20:09:16","modified_gmt":"2025-12-07T20:09:16","slug":"measurement-bonds","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/","title":{"rendered":"Measurement of Bonds"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"A company issues $100,000 worth of three-year bonds when the market interest rate is 4%. What are the sales proceeds?\",\n    \"text\": \"A company issues $100,000 worth of three-year bonds when the market interest rate on bonds of comparable risk and terms is 4% per annum. The bonds pay 5% interest annually. The sales proceeds of the bonds when issued is closest to:\\n\\nA. $97,200.\\nB. $100,000.\\nC. $102,775.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is C.\\n\\nUsing the financial calculator:\\nFV = $100,000\\nn = 3 years\\nI\/Y = 4%\\nPMT = $5,000 (5% \u00d7 $100,000)\\n\\nTherefore, the bond\u2019s market value (sales proceeds) is PV = $102,775.\"\n    }\n  }\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"How much would a company pay to retire bonds if discount rates fall?\",\n    \"text\": \"A company issues $10 million of bonds at face value. A year later, the company decides to retire the bonds. If the market discount rate at the time of retirement is less than the market discount rate at the time of issuance, the amount of money paid to retire the debt would be:\\n\\nA. Exactly $10 million.\\nB. More than $10 million.\\nC. Less than $10 million.\",\n    \"answerCount\": 1,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"The correct answer is B.\\n\\nThe company must pay the market value of the bond at retirement. Because bond prices move inversely to discount rates, a decrease in the market discount rate raises the bond\u2019s market value. Therefore, the company would pay more than the $10 million face value.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/r1ck8FrAMtw\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>Bonds refer to the contractual promises made by a company to pay its lenders or bondholders cash in future in exchange for cash in the present.<\/p>\n<p>Generally speaking, bonds involve promises to make two types of future cash payments to bondholders: the face value of the bond, and periodic interest payments.<\/p>\n<p>The face value of a bond, otherwise referred to as the principal, par value, stated value, or maturity value, is the amount of cash that is payable to bondholders when a bond matures. The periodic interest payments, on the other hand, are made based on the interest or coupon rate which is promised in the bond contract being applied to a bond\u2019s face value.<\/p>\n<p>A bond\u2019s future cash payments are discounted to the present, using the market rate of interest, to arrive at its market value. The market rate of interest refers to the rate demanded by bondholders given the risks associated with a bond\u2019s future cash payment obligations.<\/p>\n<p>If the coupon rate is higher than the market rate when a bond is issued, the bond is said to be selling at a premium since its market value will be higher than its face value. Conversely, if the coupon rate is lower than the market rate when a bond is issued, the bond is said to be selling at a discount since its market value will be less than its face value.<\/p>\n<h2><strong>Initial Recognition, Initial Measurement and<br \/>\nSubsequent Measurement of Bonds<\/strong><\/h2>\n<p>Sales proceeds or the cash received when a bond is issued is reported as a financing cash inflow on the issuing company\u2019s statement of cash flows. Additionally, bonds payable are usually measured and reported as the sales proceeds on the issuing company\u2019s balance sheet at the time of issue, i.e., at the face value of the bond less any discount, or plus any premium.<\/p>\n<p>The following three-step approach can be used to account for bonds that are issued, whether at face value, at a premium, or a discount to face value:<\/p>\n<ol>\n<li>identify key features of the bond and the market interest rate necessary to determine sales proceeds;<\/li>\n<li>determine future cash outflows (interest payments and principal repayment); and<\/li>\n<li>discount the future cash flows and sum their present value to obtain the value of the bonds and therefore the sales proceeds from issuing the bonds.<\/li>\n<\/ol>\n<blockquote>\n<h3><strong>Question 1<\/strong><\/h3>\n<p>A company issues $100,000 worth of three-year bonds when the market interest rate on bonds of comparable risk and terms is 4% per annum. The bonds pay 5% interest annually. The sales proceeds of the bonds when issued is <em>closest<\/em> to:<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">$97,200.<\/li>\n<li data-tadv-p=\"keep\">$100,000.<\/li>\n<li data-tadv-p=\"keep\">$102,775.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>C<\/strong>.<\/p>\n<p>Using the financial calculator:<\/p>\n<ul>\n<li>face value, FV = $100,000;<\/li>\n<li>time to maturity, n = 3 years;<\/li>\n<li>market rate at issuance, I\/Y = 4%; and<\/li>\n<li>coupon rate = 5%, so interest payments, PMT = $100,000 \u00d7 5% = $5,000.<\/li>\n<\/ul>\n<p>Therefore, sales proceeds or market value of the bond, PV = $102,775.<\/p>\n<h3><strong>Question 2<\/strong><\/h3>\n<p>A company issues $10 million of bonds at face value. A year later, the company decides to retire the bonds. If the market discount rate at the time of retirement is less than the market discount rate at the time of issuance, the amount of money paid to retire the debt would be:<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">Exactly $10 million.<\/li>\n<li data-tadv-p=\"keep\">More than $10 million.<\/li>\n<li data-tadv-p=\"keep\">Less than $10 million value.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>B<\/strong>.<\/p>\n<p>The company would pay the market value of the bond. Since the market value of the bond is negatively related to the market discount rate, a decrease in the discount rate would increase the market value of the bond. For this reason, the company would pay an amount higher than the bonds\u2019 face value.<\/p>\n<\/blockquote>","protected":false},"excerpt":{"rendered":"<p>Bonds refer to the contractual promises made by a company to pay its lenders or bondholders cash in future in exchange for cash in the present. Generally speaking, bonds involve promises to make two types of future cash payments to&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5],"tags":[],"class_list":["post-3946","post","type-post","status-publish","format-standard","hentry","category-financial-reporting-and-analysis","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Measurement of Bonds | CFA Level 1 - AnalystPrep<\/title>\n<meta name=\"description\" content=\"Learn how bonds are measured, including issuance at a discount or premium, amortization methods, and their impact on financial statements.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Measurement of Bonds | CFA Level 1 - AnalystPrep\" \/>\n<meta property=\"og:description\" content=\"Learn how bonds are measured, including issuance at a discount or premium, amortization methods, and their impact on financial statements.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/\" \/>\n<meta property=\"og:site_name\" content=\"AnalystPrep | CFA\u00ae Exam Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2019-10-08T13:33:00+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2025-12-07T20:09:16+00:00\" \/>\n<meta name=\"author\" content=\"Simon\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Simon\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/\"},\"author\":{\"name\":\"Simon\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687\"},\"headline\":\"Measurement of Bonds\",\"datePublished\":\"2019-10-08T13:33:00+00:00\",\"dateModified\":\"2025-12-07T20:09:16+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/\"},\"wordCount\":596,\"articleSection\":[\"Financial Reporting and Analysis\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/\",\"name\":\"Measurement of Bonds | CFA Level 1 - AnalystPrep\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\"},\"datePublished\":\"2019-10-08T13:33:00+00:00\",\"dateModified\":\"2025-12-07T20:09:16+00:00\",\"author\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687\"},\"description\":\"Learn how bonds are measured, including issuance at a discount or premium, amortization methods, and their impact on financial statements.\",\"breadcrumb\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Measurement of Bonds\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\",\"name\":\"AnalystPrep | CFA\u00ae Exam Study Notes\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687\",\"name\":\"Simon\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/analystprep-150x150.png\",\"contentUrl\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/analystprep-150x150.png\",\"caption\":\"Simon\"},\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/analystprep\/\"}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/r1ck8FrAMtw\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"2682\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2019-10-08T13:33:00+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Measurement of Bonds | CFA Level 1 - AnalystPrep","description":"Learn how bonds are measured, including issuance at a discount or premium, amortization methods, and their impact on financial statements.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/","og_locale":"en_US","og_type":"article","og_title":"Measurement of Bonds | CFA Level 1 - AnalystPrep","og_description":"Learn how bonds are measured, including issuance at a discount or premium, amortization methods, and their impact on financial statements.","og_url":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/","og_site_name":"AnalystPrep | CFA\u00ae Exam Study Notes","article_published_time":"2019-10-08T13:33:00+00:00","article_modified_time":"2025-12-07T20:09:16+00:00","author":"Simon","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Simon","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/"},"author":{"name":"Simon","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687"},"headline":"Measurement of Bonds","datePublished":"2019-10-08T13:33:00+00:00","dateModified":"2025-12-07T20:09:16+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/"},"wordCount":596,"articleSection":["Financial Reporting and Analysis"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/","name":"Measurement of Bonds | CFA Level 1 - AnalystPrep","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website"},"datePublished":"2019-10-08T13:33:00+00:00","dateModified":"2025-12-07T20:09:16+00:00","author":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687"},"description":"Learn how bonds are measured, including issuance at a discount or premium, amortization methods, and their impact on financial statements.","breadcrumb":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/measurement-bonds\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/cfa-level-1-exam\/"},{"@type":"ListItem","position":2,"name":"Measurement of Bonds"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/","name":"AnalystPrep | CFA\u00ae Exam Study Notes","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687","name":"Simon","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/analystprep-150x150.png","contentUrl":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/analystprep-150x150.png","caption":"Simon"},"url":"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/analystprep\/"}]},"og_video":"https:\/\/www.youtube.com\/embed\/r1ck8FrAMtw","og_video_type":"text\/html","og_video_duration":"2682","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2019-10-08T13:33:00+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/3946","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/comments?post=3946"}],"version-history":[{"count":24,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/3946\/revisions"}],"predecessor-version":[{"id":56629,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/3946\/revisions\/56629"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/media?parent=3946"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/categories?post=3946"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/tags?post=3946"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}