Assume that on February 1, 2016, Sierra, Corp., issues 7 percent, 10-year bonds payable with a maturity value of $500,000. The bonds pay interest on January 31 and July 31, and Sierra amortizes any premium or discount by the straight-line method. Sierra's fiscal year-end is December 31.

Requirements

1. If the market interest rate is 6.5 percent when Sierra, Corp., issues its bonds, will the bonds be priced at par, at a premium, or at a discount? Explain.

2. If the market interest rate is 8 percent when Sierra, Corp., issues its bonds, will the bonds be priced at par, at a premium, or at a discount? Explain.