What bond premium did Graff Corporation experience when purchasing their bonds?

The bond premium represents the amount by which the purchase price of a bond exceeds its face value. When Graff Corporation purchases bonds at a premium, it indicates that the market interest rate is lower than the bond's stated interest rate, making the bonds more attractive to investors.

If the bonds have a face value of, say, $100,000 with a stated interest rate of 6%, and the market rate is only 4%, investors would be willing to pay more than the face value to acquire these bonds, hence leading to a bond premium.

In this context, the bond premium of $8,111 shows that Graff Corporation purchased the bonds for $108,111. The difference between this purchase price and the face value signifies the premium paid, reflecting an increased demand for the specific bonds due to higher interest returns compared to available market rates.

Understanding the concept of premiums is crucial in financial accounting as it affects the future interest expense recognized in the company’s financial statements, as the premium is amortized over the life of the bond. This amortization would reduce interest expense recognized in future periods, which is a fundamental aspect of bond accounting.