Question: A $20,000 zero-coupon bond is being issued by a company. According to the indenture, it comes due in
exactly two years. The parties have negotiated an annual interest rate to be earned of 6 percent. How is the price
to be paid for a bond determined after an effective rate of interest has been established?
Answer: Determination of the price of a bond is a present value computation in the same manner as that
demonstrated previously in the coverage of intangible assets. Here, a single cash payment of $20,000 is to be made
by the debtor to the bondholder in two years. The parties have negotiated an annual 6 percent effective interest
rate. Thus, a portion of the future cash ($20,000) serves as interest at an annual rate of 6 percent for this period
of time. In a present value computation, total interest at the designated rate is calculated and subtracted to leave
the present value amount. That is the price of the bond, often referred to as the principal. Interest is computed at 6
percent for two years and removed. The remainder is the amount paid for the bond.