How are bonds measured at issuance?
INITIAL MEASUREMENT OF BONDS
The initial issue price of a bond depends on two factors:
1 . The promised cash payments indicated in the bond contract.
2 . The yield to maturity required by investors to induce them to purchase the bonds.
When the coupon rate equals the historical market interest rate or initial yield to maturity, then the initial issue price equals the face value of the bonds. An initial issue price equal to the face value of the bonds means that the implicit interest rate equals the yield to maturity.
When the face value and maturity value of the bonds exceed the issue price, the difference between the face value and the present value represents interest on the amount borrowed. The calculation demonstrates that investors earn interest on the amounts invested, but they receive it all at maturity. The interest rate on zero coupon bonds is an implicit interest rate, because it is implied by the difference between the face amount paid at maturity and the initial issue price.
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