Part 1: If the company decided to issue a bond to raise cash for the constructio
ID: 2465230 • Letter: P
Question
Part 1: If the company decided to issue a bond to raise cash for the construction of the new DC, what would be the amount of proceeds received by the company if on January 1, 2016 the company issues $12,775,000 in 9% coupon bonds due December 31, 2020 with semi-annual interest payments due July 1 and December 31 each year? Assume the market rate is 5% for companies with risk profiles similar to the company. Part 2: In regards to this bond, what amount of gain or loss, if any, would need to be recorded by the company if the bond was originally sold January 1, 2016 and the fair value option is applied for the first time on January 1, 2017 when market rates have changed to 6%?
Explanation / Answer
(1)
Bond face value = $12,775,000
Semi-annual coupon = $12,775,000 x 9% x (6/12) = $574,875
Number of coupon payments = 5 x 2 = 10
Semi-annual interest rate = 5% / 2 = 2.5%
Issue proceeds = Present value (PV) of future cash flows from bond
= PV of coupon payments + PV of face value after 5 years
= $574,875 x PVIFA(2.5%, 10) + $12,775,000 x PVIF(5%, 5)
= $574,875 x 8.7521 + $12,775,000 x 0.7835
= $(5,031,363.49 + 10,009,212.5)
= $15,040,575.99
NOTE: First question is answered.