1. Why is 0.7 used to compute for the PV of the principal?2. Why is 4 used to compute for the PV of interest payments?3. Why is 7.48% used to compute for the interest expense? Total Proceeds (P1,000 x 1,000)Less: Fair value of the bonds without conversion privilege1,000,000900,000100,000Total Share Premium(A)Using 7.48%Present value of Principal (1,000,000 x 0.7 )Add: Present value of interest payments (50,000 x 4)Total present value700,000200,000900,000 On January 1, 2021, Lanao del Norte Company Co. issues convertible bondswith a maturity of five years. The issue is for a total of 1,000 convertiblebonds. Each bond has a par value of P1,000, a stated interest rate of 5% peryear, and is convertible into 5 ordinary shares of Lanao del Norte Company.The convertible bonds were issued to Lanao del Sur Company at par. Theper-share price of Lanao del Norte share is P15. Quotation for similar bondsissued by Lanao del Norte without the conversion privilege suggest thatthey can be sold for P900,000.

Present value (PV) is the current value of a future sum of money or stream of cash flows given a…

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1. Why is 0.7 used to compute for the PV of the principal? 2. Why is 4 used to compute for the PV of interest payments?

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter14: Financing Liabilities: Bonds And Long-term Notes Payable

Section: Chapter Questions

Problem 21E: On July 2, 2018, McGraw Corporation issued 500,000 of convertible bonds. Each 1,000 bond could be...

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Question

1. Why is 0.7 used to compute for the PV of the principal?

2. Why is 4 used to compute for the PV of interest payments?

3. Why is 7.48% used to compute for the interest expense?

Total Proceeds (P1,000 x 1,000)
Less: Fair value of the bonds without conversion privilege
1,000,000
900,000
100,000
Total Share Premium
(A)
Using 7.48%
Present value of Principal (1,000,000 x 0.7 )
Add: Present value of interest payments (50,000 x 4)
Total present value
700,000
200,000
900,000

On January 1, 2021, Lanao del Norte Company Co. issues convertible bonds
with a maturity of five years. The issue is for a total of 1,000 convertible
bonds. Each bond has a par value of P1,000, a stated interest rate of 5% per
year, and is convertible into 5 ordinary shares of Lanao del Norte Company.
The convertible bonds were issued to Lanao del Sur Company at par. The
per-share price of Lanao del Norte share is P15. Quotation for similar bonds
issued by Lanao del Norte without the conversion privilege suggest that
they can be sold for P900,000.

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