 In this discussion, we will discuss the discussion question of describe how to calculate bond price Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website Broken out by category further broken out by course each course then organized in a logical Reasonable fashion making it much more easy to find what you need than can be done on a YouTube page We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable So once again click the link below for a free month membership to our website and all the content on it If we see a question like this an essay question or discussion question if we don't know where to start We might be asking what is what are they talking about bond price? I don't have no idea how to calculate the bond price. We may start out with just what is a bond? We could start out with what is a bond? We might be able to pick up some points there as we think through that Then we could jog our memory in terms of how do we figure out what a bond price will be or possibly even if we don't know exactly What they're asking we may stumble upon it even though we don't know what they mean by bond price possibly So if we think about what is a bond We can think well a bond is going to be something that a company is going to issue in order to help generate cash So we're trying to get financing to the company. So if we're trying to get financing to the company We're going to issue kind of like a note. It's going to be similar to a loan We are going to issue a promise To repay to pay something in the future in order to get money now So the journal entry would then be that we're going to debit cash And we're going to credit the bond payable and the bond payable is going to be a promise to pay They're typically in terms of like a thousand dollar bonds We can have multiple bonds thousand dollar multiple bonds of a thousand dollar typically and then we're going to that We would issue and then we'll have some kind of stated rate on the bond And usually there's two flows assumptions that will happen here with the bond one is that We're going to we're going to say that sometime in the future at the maturity date We're going to pay back a thousand dollars Because that's that's what it says on the bond. That's the promise of the bond and then Periodically we're going to have the interest payments that are going to happen. Let's say there's there's semi-annual interest payments So we're going to say semi-annual interest payments every six months. We're going to pay interest So now we have two kind of cash flow type methods that are going to happen here. We're going to pay back The one the one thousand and then we're going to have this this number of payments that are going to happen throughout the time period So what we're talking about now is that what's the bond price? Well, what does that mean then? We're talking about what we would issue the bond for basically what would be what's the bond worth and Note that it's not necessarily going to be a thousand because The reason it might not be a thousand is if the market rate is different Then the rates stated on the bond. So if the market rate were say 12 percent then then The the the price of the bond would differ because we're only paying 10 percent So if someone can go out somewhere else in other words and get 12 percent For their thousand dollars, they're not going to give us a thousand dollars and we got to decide well How much should the price of our bond be if we're going to try to sell this thousand dollar bond and We only pay 10 percent where the market is 12 percent. How can we fix this? Well, we could change the price of the bond we can sell it for less than a thousand dollars and So and that and that's all we need to know for a lot of types of tests a lot of questions But then the question is well, how you know, how are we going to figure out exactly what the price could be? I could see well, they're going to get you know, if this if this person goes somewhere else They're not going to go here because they know they're going to get a higher rate But what's the price that we can sell this thing for in order to? In order to equalize this difference in interest rates Well, we're going to present value that to do it to do that and what we do is we're just going to take the cash flows One cash flow is a thousand dollars. It's going to happen in the future The other cash flow is a series of like an annuity and we're going to take this thousand dollars and bring it back To present value for that cash flow and we're going to take this annuity and Bring it back to present value for those cash flows And then if we add up these two present values, whatever that adds up to is going to be The amount and this isn't right, of course But this is going to be the amount that we're going to to use to calculate the the bond price Now you could get in the different ways that you would do that When you say a present value, that's probably enough that we're going to use a present value calculation But notice the present value calculation could be mathematical Some some classes might want the equation want you to say the equation There's going to be two different equations here one for the present value of one payment And then the other the present value of an annuity So you might it depending on how what kind of what kind of question you're being asked You might want to go into those two different formulas or you can say well You're going to present value it using tables oftentimes used for accounting classes that want to Limit the kind of calculator using but also not force you to go through the math of it or you can present value it using Excel or something like that So whatever the whatever the ways you present value it the theory is probably all you need for a discussion question like this And that would be that you're going to take the cash flows You're going to present value them and whatever that present value is on on the market rate So you're going to present value it on the market rate notice you present valued it on the Well, you want to present value it on the market rate right and that'll bring it to the to the present value amount Which will differ from from the face amount, and that's how you get the price