To determine the fair value of Graff Corporation's bonds, we need to consider the relevant factors that contribute to bond valuation. The fair value of bonds is generally assessed based on the present value of future cash flows, which include the periodic interest payments (coupon payments) and the principal amount that will be repaid at maturity.
When market interest rates change, the fair value of the bonds also changes. If the market interest rates are lower than the coupon rate of the bonds, the fair value will be greater than the par value, reflecting a premium. Conversely, if the market interest rates are higher than the coupon rate, the bonds would be valued at a discount.
In this case, the selected fair value of $105,000 suggests that the bonds are trading at a premium, likely due to their coupon rate being higher than the current market rates. The valuation indicates confidence in the bond's characteristics leading investors to pay above par value.
Calculating the fair value would typically involve discounting the expected cash flows from the bond (interest payments plus the face value at maturity) back to their present value using the market rate of interest relevant as of December 31, 2019. Assuming proper calculations align with the fair value provided, the value reflects the