On January 1, Year 6, The Corporation issued $1,000,000 face value, 20-year bond
ID: 2349117 • Letter: O
Question
On January 1, Year 6, The Corporation issued $1,000,000 face value, 20-year bonds. The bonds carry coupon interest of 6 percent per year, payable semiannually on June 30 and December 31. The bonds were initially priced on the market to yield 8 percent, compounded semiannually (for an effective annualized yield greater than 8 percent).The present value of a single amount for 3% 40 periods is .30656
The present value of a single amount for 4% 40 periods is .20829
The present value of an annuity for 3% 40 periods is 23.11477
The present value of an annuity for 4% 40 periods is 19.79277
Required:
a - Compute the issue price of these bonds on January 1, Year 6.
b - Compute the amount of interest expense on these bonds for Year 6 (both six month periods) assuming that the firm uses the effective-interest method of amortizing bond premium or discount.
Explanation / Answer
a) Present value of interest payments is 30,000* 19.79277= 593,783.10 Present value of principal 1,000,000*.20829= 208,290 So the bond should sell for 593,783,10 +208,290= 802,073.10 6/30 DR Interest expense (802,073.10* .04) 32,082.92 CR Amortization of bond discount 2,082.92 CR Cash (or interest payable) 30,000 12/31 DR Interest expense (804,156.02 *.04) 32,166.24 CR Amortization of bond discount 2,166.24 CR Cash (or interest payable) 30,000