On January 1, 20X0, Korman, Inc., issued $1.0 billion of 3% zero coupon subordinated debentures, which were issued at a price of $553.68 per $1,000 principal amount at maturity. The bonds were priced to yield 3% per annum, computed on an annual basis. The fair value of the 3% debentures was $813 million on December 31, 20X2.

Required:

1. How much cash did the company receive when it issued these debentures?

2. The debentures mature in 20 years from the date of issuance, but no interest payments are made until maturity. Show that the issue price of $553.68 gives investors a 3% yield to maturity.

3. Reproduce the journal entries Korman would record in 20X0 for the debentures. Indicate whether the cash increase or decrease represents an operating, investing, or financing activity.

4. Explain why the debentures have a market value of $813 million at the end of 20X2, almost $300 million more than the 20X0 issue price.