Christmas Anytime issues $720,000 of 6% bonds, due in 20 years, with interest pa

Question

Christmas Anytime issues $720,000 of 6% bonds, due in 20 years, with interest payable semiannually on June 30 and December 31 each year.

Calculate the issue price of a bond and complete the first three rows of an amortization schedule when:

1a. The market interest rate is 6% and the bonds issue at face amount.

Issue Price=?

1b. The market interest rate is 7% and the bonds issue at a discount.

issue price=?

1c. The market interest rate is 5% and the bonds issue at a premium.

Issue price=?

Date Cash Paid Interest Expense Increase in Carrying Value Carrying Value 01/01 06/30 12/31

Explanation / Answer

1a.

Issue price = $720,000

Date

Cash paid

Interest expense

Increase in carrying value

Carrying value

(Face value * 6% * 1/2)

(Carrying amount * 6% * 1/2)

01/01

$ 21,600.00

$ 21,600.00

$ 0.00

$ 720,000.00

30/06

$ 21,600.00

$ 21,600.00

$ 0.00

$ 720,000.00

31/12

$ 21,600.00

$ 21,600.00

$ 0.00

$ 720,000.00

1b.

Issue price = Present value of coupon payments + Present value of redemption value

Present value of annuity = Annuity * {1 – (1+r)-n}/r

Present value of annuity of semi-annual coupon payments = $21,600 * (1 – 1.035-40)/0.035 = $21,60 * 21.3551 = $461,270.16

Present value of redemption value = $720,000 / 1.03540 = $181,850.33

Issue price = $461,270.16 + $181,850.33 = $643,120.49

Date

Cash paid

Interest expense

Increase in carrying value

Carrying value

(Face value * 6% * 1/2)

(Carrying amount * 7% * 1/2)

01/01

$ 21,600.00

$ 22,509.22

$ 909.22

$ 644,029.71

30/06

$ 21,600.00

$ 22,541.04

$ 941.04

$ 644,970.75

31/12

$ 21,600.00

$ 22,573.98

$ 973.98

$ 645,944.72

1c.

Present value of annuity of semi-annual coupon payments = $21,600 * (1 – 1.025-40)/0.025 = $21,60 * 25.1028 = $542,220.48

Present value of redemption value = $720,000 / 1.02540 = $268,146.44

Issue price = $542,220.48 + $268,146.44 = $810,366.92

Date

Cash paid

Interest expense

Increase in carrying value

Carrying value

(Face value * 6% * 1/2)

(Carrying amount * 5% * 1/2)

01/01

$ 21,600.00

$ 20,259.17

-$ 1,340.83

$ 809,026.09

30/06

$ 21,600.00

$ 20,225.65

-$ 1,374.35

$ 807,651.75

31/12

$ 21,600.00

$ 20,191.29

-$ 1,408.71

$ 806,243.04

Date

Cash paid

Interest expense

Increase in carrying value

Carrying value

(Face value * 6% * 1/2)

(Carrying amount * 6% * 1/2)

01/01

$ 21,600.00

$ 21,600.00

$ 0.00

$ 720,000.00

30/06

$ 21,600.00

$ 21,600.00

$ 0.00

$ 720,000.00

31/12

$ 21,600.00

$ 21,600.00

$ 0.00

$ 720,000.00

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.