Question

Muleshoe Corporation issues a 5-year, $200,000 zero-coupon bond at an effective interest rate of 8%. Assuming semi-annual compounding, how much will Muleshoe report in the liability section of its balance sheet immediately after issuance?

	$135,113
	$136,117

$200,000

Answer 1

$135,113.

amount to be recognized as liability immediately after issuance of zero coupon bond:

= face value / (1 +r)^n

here,

r = 8% * 1/2 =>4%.

=>0.04....(since we have semi annual compounding).

n = 5 years * 2 semi annual period

=>10 periods.

value to be recognised as liability

=>$200,000 / (1.04)^10

=>$135,112.83

=>$135,113.