Larkins issues a ten-year $2,000,000 bond that has an 8 percent face interest ra

Question

Larkins issues a ten-year $2,000,000 bond that has an 8 percent face interest rate that is paid semi-annually. If the market rate of interest is 10 percent, how much money will Larkins receive? (Points : 1)

$1,516,314

$1,675,677

$1,750,776

$1,805,707

Question 7.7. Refer to Question 6. What is the interest expense for the first period? (Points : 1)

$37,453.98

$58,678.01

$87,538.80

$102,758.42

Question 8.8. Refer to Questions 6 and 7. What is the carrying value of the note at the end of the first period? (Points : 1)

$1,354,213.09

$1,520,583.14

$1,758,314.80

$1,895,623.21

Explanation / Answer

Answer:

Larkins will receive current value of bond. Current Value of bond is calculated by using following formula:

Current Value of Bond = Interest x PVIFA (5%, 20) + Maturity Value of Bond x PVIF (5%, 20)

Here discounting rate is taken 5% since the interest is paid semi-annually & current market rate is 10%, So the expected future cash flow is to be discounted by taking current market rate which is 5% discounting rate (10%/2).

Maturity Value of Bond = $2,000,000

Semi-Annual Interest = $2,000,000 x 8% x ½ = $80,000

Value of PVIFA (5%, 20) = 12.4622 (you can calculate this value either by calculator or can see from PVIFA table)

Value of PVIF (5%, 20) = 0.3769 (you can calculate this value either by calculator or can see from PVIF table)

So, Current Value of Bond = ($80,000 x 12.4622) + ($2,000,000 x 0.3769) = $996,976 + $753,800 = $1,750,776

Therefore, Larkins will receive $1,750,776 money from issue of bonds.

Question 7.7. Refer to Question 6. What is the interest expense for the first period? (Points : 1)

$37,453.98

$58,678.01

$87,538.80

$102,758.42

--- Question is incomplete… Please provide detail of question number 6.

Question 8.8. Refer to Questions 6 and 7. What is the carrying value of the note at the end of the first period? (Points : 1)

$1,354,213.09

$1,520,583.14

$1,758,314.80

$1,895,623.21

--- Question is incomplete… Please provide detail of question number 6 & 7

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