Sky King Company sold 9 million of four year, 8% debentures onJuly 1, 2007. The

Question

Sky King Company sold 9 million of four year, 8% debentures onJuly 1, 2007. The bonds sold to yield a real rate of7%. Interest is paid annually on June 30. A. Determine the prize of the bonds. B. Prepare an amortization schedule for the bonds. C. Using a format, record the entry to the accountingsystem that is necessary to recognize interest on the bonds at June 30, 2008. D. Assume the bonds had been sold to yield a real rateof 9%. At what price would they have sold? Sky King Company sold 9 million of four year, 8% debentures onJuly 1, 2007. The bonds sold to yield a real rate of7%. Interest is paid annually on June 30. A. Determine the prize of the bonds. B. Prepare an amortization schedule for the bonds. C. Using a format, record the entry to the accountingsystem that is necessary to recognize interest on the bonds at June 30, 2008. D. Assume the bonds had been sold to yield a real rateof 9%. At what price would they have sold?

Explanation / Answer

Answer:

Determine the prize of the bonds:

Face Value = $1,000

Amount of bonds = $9,000,000/1,000 = 9,000 bonds

Interest payment = Coupon rate * Face Value = 0.08 * $1,000 =$80

Time to maturity (t) = 4 years

Market Interest Rate = 7% per year

PV = [C * (1 – 1 / (1+r) t) / r] + [FV / (1+r)t]

PV = [80 * (1 – 1 / (1+0.07) 4) / 0.07] + [1000/ (1+0.07) 4]

PV = [80 * (1 – 1 / (1.07) 4) / 0.07] + [1000 /(1.07) 4]

PV = [80 * (1 – 1 / 1.31079601) / 0.07] + [1000 /1.31079601]

PV = [80 * (1 – 0.76289521) / 0.07] + [762.8952]

PV = [80 * (0.23710479) / 0.07] + [762.8952]

PV = [80 * 3.3872] + [762.8952]

PV = [270.976] + [762.8952]

PV = $1033.8712

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