On January 1, 20x6, Cell Co. lends some money in exchange for a 10% $100,000 10-
ID: 2343225 • Letter: O
Question
On January 1, 20x6, Cell Co. lends some money in exchange for a 10% $100,000 10-year note. The market rate for similar notes is 8%. Interest is received semiannually each July 1 and January 1. The financial year ends December 31. Round to the nearest whole number. (Hint: Prepare a partial amortization schedule to July 1, 20x8)
a. The note is issued at - (par / premium / discount)
b. The present value of the note is - $
c. The cash received at July 1, 20x6 is -$
d. The interest revenue to Cell Co. at December 31, 20x7 is -$
e. The carrying amount of the note at July 1, 20x8 is -$
Explanation / Answer
a) Ans:
Coupon Rate =10%
Market rate=8%
Coupon rate is more than Market rate i.e It is issued at Premium
b) The Present Value of the Bond is
Ans: Interest received per 6 months (PVAF 4% 20 Years) + Maturity Amount (PVF 4% 20 Years)
=(100,000*10/100*6/12)(13.590) + $100,000 *0.4563
=67,950 +45,630=$113,580
c. The cash received at July 1, 20x6 is -$
Ans: 100,000*10/100*6/12=$5000
d. The interest revenue to Cell Co. at December 31, 20x7 is -$
Ans: Interest revenue for 1 year= $10,000 (5000+5000)
Less: Amortisation cost ($113,580-$100,000)/10 years ($1358)
Net Revenue= $8642
E) The carrying amount of the note at July 1, 20x8 is -$
$5000*PVAF(4%,15 Years) + $100,000*PVF (4%,15y)
$5000* 11.118 +$100,000*.555
=$111, 090