On January 1 of this year, Barnett Corporation sold bonds with a face value of $

Question

On January 1 of this year, Barnett Corporation sold bonds with a face value of $502,500 and a coupon rate of 5 percent. The bonds mature in 8 years and pay interest annually on December 31 Barnett uses the effective-interest amortization method. Ignore any tax effects. Each case is independent of the other cases. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use the appropriate factor(s) from the tables provided Round your final answers to whole dollars.) Required 1. Complete the following table. The interest rates provided are the annual market rate of interest on the date the bonds were issued cashpad lennces acok&Resources; 10-06 Repon bonds Diffcuity: 3 Hard Leaing Oyeotive 104

Explanation / Answer

Solution:

Case A (5%)

Issue Price of Bond = Present Value of Interest Payments + Present Value of Maturity Value of Bond

In this case since the coupon rate and market rate of interest are equal that is 5%, Therefore Present value at 5% discount rate will be equal to the Face Value of Bond.

therefore, Issue price of bond at 5% discount rate = Face value of bond = $502500

Interest Expense Recorded in Year 1 = Issue Price * Market Rate of Interest = $502500*5% = $25125

Cash Paid for Interest in Year 1= Face Value * Coupon rate = $502500 * 5% = $25125

Cash Paid at maturity for Bond Principal = $502500

Case B (6%):

Issue Price of Bond = Present Value of Interest Payments + Present Value of Maturity Value of Bond

Issue price of bond = $25125 * cumulative PV factor at 6% for 8 Periods + 502500*PV factor at 6% at 8th period

= $25125 * 6.463212 + 502500 * 0.627412371 = $471295.79

Interest Expense Recorded in Year 1 = Issue Price * Market Rate of Interest = $471295.79 * 6% = $28277.75

Cash Paid for Interest in Year 1= Face Value * Coupon rate = $502500 * 5% = $25125

Cash Paid at maturity for Bond Principal = $502500

Case C (4%):

Issue Price of Bond = Present Value of Interest Payments + Present Value of Maturity Value of Bond

Issue price of bond = $25125 * cumulative PV factor at 4% for 8 Periods + 502500*PV factor at 4% at 8th period

= $25125 * 6.73274487 + 502500 * 0.73069020 = $536332.04

Interest Expense Recorded in Year 1 = Issue Price * Market Rate of Interest = $536332.04 * 4% = $21453.28

Cash Paid for Interest in Year 1= Face Value * Coupon rate = $502500 * 5% = $25125

Cash Paid at maturity for Bond Principal = $502500

Case A (5%) Case A (6%) Case A (4%) a. Cash received at issuance $502,500 $471,296 $536,332 b. Interest expense recorded in Year 1 $25,125 $28,278 $21,453 c. Cash paid for interest in year 1 $25,125 $25,125 $25,125 d. Cash paid at maturity for Bond principal $502,500 $502,500 $502,500

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