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Zero Coupon Bonds quiz #1

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  • What is a zero coupon bond and how is it different from a regular bond?
    A zero coupon bond is a bond that does not pay periodic interest (coupons) and is sold at a discount to its face value. Unlike regular bonds, which pay interest over time, zero coupon bonds only pay the full face value at maturity.
  • Why are zero coupon bonds issued at a discount, and how is the issue price determined?
    Zero coupon bonds are issued at a discount because they pay no interest, making them less attractive compared to bonds with interest payments. The issue price is determined by discounting the face value using the prevailing market interest rate, resulting in a price lower than the face value.
  • How is the initial journal entry recorded when a company issues zero coupon bonds at a discount?
    When zero coupon bonds are issued at a discount, the company debits cash for the amount received, debits discount on bonds payable for the difference between face value and cash received, and credits bonds payable for the full face value.
  • How is the discount on zero coupon bonds amortized over the life of the bond, and what happens at maturity?
    The discount on zero coupon bonds is amortized over the bond's life by periodically transferring a portion of the discount to interest expense. At maturity, the company pays the full face value to bondholders, debiting bonds payable and crediting cash.
  • What is a zero coupon bond and how does it differ from a regular bond?
    A zero coupon bond pays no periodic interest and is sold at a discount to its face value, while a regular bond pays periodic interest (coupons) to investors.
  • Why are zero coupon bonds issued at a discount to their face value?
    Zero coupon bonds are issued at a discount because they pay no interest, making them less attractive than bonds with interest payments, so investors pay less upfront.
  • How is the issue price of a zero coupon bond determined?
    The issue price is calculated by discounting the bond's face value using the prevailing market interest rate, resulting in a price lower than the face value.
  • What is the initial journal entry when a company issues zero coupon bonds at a discount?
    The company debits cash for the amount received, debits discount on bonds payable for the difference between face value and cash received, and credits bonds payable for the full face value.
  • How is the discount on zero coupon bonds amortized over the life of the bond?
    The discount is amortized by periodically transferring a portion of it to interest expense each period until the discount balance is reduced to zero at maturity.
  • What journal entry is made at the maturity of a zero coupon bond?
    At maturity, the company debits bonds payable for the face value and credits cash for the same amount to pay back the principal to bondholders.