Case Solution Essay

991 Words Jan 4th, 2013 4 Pages
Lyons Document Storage Corporation Case Analysis

1. Before maturity, a bond may be selling at the face value or at a price greater or lesser than the face value.The terms “premium” and “discount” refer to the difference that exists from the face value of the bond. Bonds selling at a price greater than the face value are said to be at a premium and the bonds selling at a price lesser than the face value are said to be at a discount.
Premium or discount occurs when nominal interest rate(or coupon rate) of the bond differs from the current market rate of interest demanded by lenders.Regardless of the required yield, the bond price will reach face value as its approaches the maturity date.

The bond with a face value of $1000 is
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b. Effect on Current year’s earnings
From the point of view of the income statement, the current year earnings would decrease by $2.24 million ($11.54million - $9.3 million). c. Effect on future year’s earnings
Future year earnings on the other hand would increase by $200,000 per annum till January 2019 due to savings in the interest of 2% (8% bonds to 6% bonds) and the number of interest payments would reduce by 1 (since July 2019 coupon payment won’t be required) thus saving $400,000 for that period . Present Value of $1 | | At 8% | At 6% | Difference | Received Semiannually for 10.5 | 15.41502414 | - | | Received Semiannually for 10 years | - | 14.87747 | Saving on Interest | Redemption Value of $1 after 10.5 years | 0.537549276 | - | | Redemption Value of $1 after 10 years | - | 0.553676 | Saving on Principal | P.V. of Coupon Earned on $1000 bond | 616.6009655 | 446.3242 | 170.2767196 | P.V. of Redemption Value of $1000 bond | 537.5492759 | 553.6758 | -16.1264783 | Total | | 1154.150241 | 1000 | 154.1502414 |

Saving in principal by issuing new bonds = -16.12*10000 = -$ 161,264.78 (loss)
Saving in Interest Payments = 170.27*10000 = $1,702,767.20
Therefore we see that it will cost less in

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