To compute: The issue price of bonds when:
- 1. The market interest rate is 6% and the bonds issue at face amount.
- 2. The market interest rate is 7% and the bonds issue at a discount.
- 3. The market interest rate is 5% and the bonds issue at a premium.
Answer to Problem 9.1BP
The issue prices of bonds when:
- 1. The market interest rate is 6% and the bonds issue at face amount is $850,000.
- 2. The market interest rate is 7% and the bonds issue at a discount is $789,597.
- 3. The market interest rate is 5% and the bonds issue at a premium is $789,597.
Explanation of Solution
Bonds are a kind of interest bearing notes payable, usually issued by companies, universities and governmental organizations. It is a debt instrument used for the purpose of raising fund of the corporations or governmental agencies. If selling price of the bond is equal to its face value, it is called as par on bond. If selling price of the bond is lesser than the face value, it is known as discount on bond. If selling price of the bond is greater than the face value, it is known as premium on bond.
Determine the issue price of bonds.
Figure (1)
Working Note:
Determine the amount of Interest Payment (PMT).
Determine the amount of Market interest rate (I).
Determine the amount of periods to maturity (N).
Figure (2)
Determine the amount of Market interest rate (I).
Figure (3)
Determine the amount of Market interest rate (I).
To complete: The amortization schedule for first three rows, when:
- 1. The market interest rate is 6% and the bonds issue at face amount.
- 2. The market interest rate is 7% and the bonds issue at a discount.
- 3. The market interest rate is 5% and the bonds issue at a premium.
Explanation of Solution
Prepare amortization schedule for the issuance of bonds when:
- 1. The market interest rate is 6% and the bonds issue at face amount.
Amortization Schedule | ||||
Date (1) |
Cash paid (2) |
Interest expense (3) |
Increase in carrying value (4) |
Carrying value (5) |
2018 |
|
|
|
|
January 01 | $850,000 | |||
June 30 | $25,500 | $25,500 | $0 | $850,000 |
December 31 | $25,500 | $25,500 | $0 | $850,000 |
Table (1)
2. The market interest rate is 7% and the bonds issue at a discount.
Amortization Schedule | ||||
Date (1) |
Cash paid (2) |
Interest expense (3) |
Increase in carrying value (4) |
Carrying value (5) |
2018 |
|
|
|
|
January 01 | $789,597 | |||
June 30 | $25,500 | $27,636 | $2,136 | $791,733 |
December 31 | $25,500 | $27,711 | $2,211 | $793,944 |
Table (2)
3. The market interest rate is 5% and the bonds issue at a premium.
Amortization Schedule | ||||
Date (1) |
Cash paid (2) |
Interest expense (3) |
Decrease in carrying value (4) |
Carrying value (5) |
2018 |
|
|
|
|
January 01 | $916,254 | |||
June 30 | $25,500 | $22,906 | $2,594 | $913,660 |
December 31 | $25,500 | $27,711 | $2,658 | $911,002 |
Table (3)
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