Financial accounting
Financial accounting
3rd Edition
ISBN: 9780077506902
Author: David J Spieceland Wayne Thomas Don Herrmann
Publisher: Mcgraw-Hill
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Chapter 9, Problem 9.3E

1.

To determine

To Identify: If the market rate is 8%, will the bonds issue at face amount, a discount or a premium and calculate price of the bonds.

1.

Expert Solution
Check Mark

Explanation of Solution

Bonds

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.

Stated interest rate (9%) is greater than the market interest rate (8%) means, the bonds issue at a premium.

Price of bonds}={Present value of principal+Present value of interest payments}=$8,539,850.83+$36,517,667.81=$45,057,518.65

Working notes:

Calculate the present value of face value of principal.

Particulars Amount ($)
Face value of bonds (a) $41,000,000
PV factor at an annual market rate of 4% for 40 periods (b) × 0.20829
Present value of face value of principal (a)×(b) $8,539,850.83

Note: The present value of $1 for 40 periods at 4% is 0.20829 (refer Table 2 in Appendix).

Calculate present value of interest payments.

Particulars Amount ($)
Interest payments amount (a) $1,845,000
PV factor at an annual market rate of 4% for 40 periods (b) ×19.79277
Present value of interest payments (a)×(b) $36,517,667.81

Note: The Present value of an ordinary annuity of $1 for 40 periods at 4% is 19.79277 (refer Table 4 in Appendix).

Calculate the amount of interest payment.

Interest payment=Face value of bonds×Stated interest rate×Time period=$41,000,000×9100×612=$1,845,000

Conclusion

Therefore, price of the bonds is $45,057,518.65.

2.

To determine

To Identify: If the market rate is 9%, will the bonds issue at face amount, a discount or a premium and calculate price of the bonds.

2.

Expert Solution
Check Mark

Explanation of Solution

Bonds

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.

Stated interest rate (9%) is equal to the market interest rate (9%) means, the bonds issue at a par.

Price of bonds}={Present value of principal+Present value of interest payments}=$7,049,076.74+$33,950,923.26=$41,000,000

Working notes:

Calculate the present value of face value of principal.

Particulars Amount ($)
Face value of bonds (a) $41,000,000
PV factor at an annual market rate of 4.5% for 40 periods (b) × 0.17193
Present value of face value of principal (a)×(b) $7,049,076.74

Note: The present value of $1 for 40 periods at 4.5% is 0.17193 (refer Table 2 in Appendix).

Calculate present value of interest payments.

Particulars Amount ($)
Interest payments amount (a) $1,845,000
PV factor at an annual market rate of 4.5% for 40 periods (b) × 18.40158
Present value of interest payments (a)×(b) $33,950,923.26

Note: The Present value of an ordinary annuity of $1 for 40 periods at 4.5% is 18.40158 (refer Table 4 in Appendix).

Calculate the amount of interest payment.

Interest payment=Face value of bonds×Stated interest rate×Time period=$41,000,000×9100×612=$1,845,000

Conclusion

Therefore, price of the bonds is $41,000,000.

3.

To determine

To Identify: If the market rate is 10%, will the bonds issue at face amount, a discount or a premium and calculate price of the bonds.

3.

Expert Solution
Check Mark

Explanation of Solution

Bonds

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.

Stated interest rate (9%) is equal to the market interest rate (10%) means, the bonds issue at a discount.

Price of bonds}={Present value of principal+Present value of interest payments}=$5,823,872.97+$31,482,387.30=$37,482,387.30

Working notes:

Calculate the present value of face value of principal.

Particulars Amount ($)
Face value of bonds (a) $41,000,000
PV factor at an annual market rate of 5% for 40 periods (b) × 0.14205
Present value of face value of principal (a)×(b) $5,823,872.97

Note: The present value of $1 for 40 periods at 5% is 0.14205 (refer Table 2 in Appendix).

Calculate present value of interest payments.

Particulars Amount ($)
Interest payments amount (a) $1,845,000
PV factor at an annual market rate of 5% for 40 periods (b) × 17.15909
Present value of interest payments (a)×(b) $31,658,514.32

Note: The Present value of an ordinary annuity of $1 for 40 periods at 5% is 17.15909 (refer Table 4 in Appendix).

Calculate the amount of interest payment.

Interest payment=Face value of bonds×Stated interest rate×Time period=$41,000,000×9100×612=$1,845,000

Conclusion

Therefore, price of the bonds is $37,482,387.30.

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Chapter 9 Solutions

Financial accounting

Ch. 9 - Prob. 11RQCh. 9 - Prob. 12RQCh. 9 - 15.If bonds issue at a discount, what happens to...Ch. 9 - Prob. 14RQCh. 9 - Prob. 15RQCh. 9 - Prob. 16RQCh. 9 - 19.If bonds with a face value of 250,000 and a...Ch. 9 - How do interest expense and the carrying value of...Ch. 9 - Prob. 19RQCh. 9 - Prob. 20RQCh. 9 - Prob. 9.1BECh. 9 - Calculate the issue price of bonds (LO95) Ultimate...Ch. 9 - Calculate the issue price of bonds (LO95) Ultimate...Ch. 9 - Calculate the issue price of bonds (LO95) Ultimate...Ch. 9 - Prob. 9.5BECh. 9 - Prob. 9.6BECh. 9 - Prob. 9.7BECh. 9 - Prob. 9.8BECh. 9 - Prob. 9.9BECh. 9 - Prob. 9.10BECh. 9 - Prob. 9.11BECh. 9 - Prob. 9.12BECh. 9 - Prob. 9.13BECh. 9 - Prob. 9.14BECh. 9 - Prob. 9.15BECh. 9 - Prob. 9.16BECh. 9 - Prob. 9.17BECh. 9 - Prob. 9.18BECh. 9 - Prob. 9.1ECh. 9 - listed below are terms and definitions associated...Ch. 9 - Prob. 9.3ECh. 9 - Prob. 9.4ECh. 9 - Prob. 9.5ECh. 9 - Prob. 9.6ECh. 9 - Prob. 9.7ECh. 9 - Prob. 9.8ECh. 9 - Prob. 9.9ECh. 9 - Prob. 9.10ECh. 9 - Prob. 9.11ECh. 9 - Prob. 9.12ECh. 9 - Prob. 9.13ECh. 9 - Prob. 9.14ECh. 9 - Prob. 9.15ECh. 9 - Prob. 9.16ECh. 9 - Compare operating and capital teasel (LO93, LO98)...Ch. 9 - Prob. 9.18ECh. 9 - Prob. 9.1APCh. 9 - Prob. 9.2APCh. 9 - Prob. 9.3APCh. 9 - Prob. 9.4APCh. 9 - Prob. 9.5APCh. 9 - Explore the impact of leases on the debt to equity...Ch. 9 - Prob. 9.7APCh. 9 - Prob. 9.1BPCh. 9 - Prob. 9.2BPCh. 9 - Prob. 9.3BPCh. 9 - Prob. 9.4BPCh. 9 - Prob. 9.5BPCh. 9 - Explore the impact of leases on the debt to equity...Ch. 9 - Prob. 9.7BPCh. 9 - Prob. 9.1APCPCh. 9 - Prob. 9.2APFACh. 9 - Prob. 9.3APFACh. 9 - Prob. 9.4APCACh. 9 - Prob. 9.5APECh. 9 - Prob. 9.7APWCCh. 9 - Prob. 9.8APEM
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