On January 1, 2011, Piper Co. issued 10-year bonds with a face value of $1,000,0

Question

On January 1, 2011, Piper Co. issued 10-year bonds with a face value of $1,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are:

PV of 1 for 10 periods at 10%           .386
PV of 1 for 10 periods at 12%           .322
PV of 1 for 20 periods at 5%          .377
PV of 1 for 20 periods at 6%              .312
PV of annuity for 10 periods at 10%        6.145
PV of annuity for 10 periods at 12%        5.650
PV of annuity for 20 periods at 5%         12.462
PV of annuity for 20 periods at 6%         11.470

Instructions:
a. Calculate the issue price of the bonds.
b. Without prejudice to your solution in Part (a), assume that the issue price was $884,000. Prepare the amortization table for 2011, assuming that amortization is recorded on interest payment dates.

Explanation / Answer

b)

Price of the bond = c × F × (1 (1 + r)-t)/r+F(1 + r)t C=Interest Rate F= Face Value r=Market Interest Rate Price of Bond= Present value of Interest payments+Present value of the bond Price of Bond 50000*(1-(1.06)^-20)/.06)+1000000/(1.06)^20 (50000*(1-.312)/.06)+1000000*.312 $885,333 Face vale $1,000,000 Discount $114,667

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