Example #4, On January 1, 2016 a company issues 100 bonds, each for $1,000, for

Question

Example #4, On January 1, 2016 a company issues 100 bonds, each for $1,000, for a discount, a the interest rate on the bond (stated/coupon rate) is 3% and the market rate is 4%. They then used this cash to purchase an automobile for $100,000 cash. The bond is to be paid in at the end of THREE years (December 31, 2018). Cash received from issuing bond Present value of maturity payment $100,000 Present value of interest payment ($100,000*.03-$3,000) Present value of cash payments Account Name Debit Credit Date 1/1/2016 12/31/2016 (Discount balance: 2,775.09-889.00-1,886.09) Date 12/31/2017 Account Name Credit (Discount balance: 1,886.09-924.56-961.53) Account Name Debit Credit Date 12/31/2018 (Discount balance is now zero)

Explanation / Answer

Solution:

Present Value Of Bond = PV of Interest payments + PV of Maturity Payment

= $3,000* 2.775091 +$100,000*0.888996 = $97,224.91

Bond Amortization Schedule Period Interest Payment Interest Expense Discount Amortized Discount Account Balance Carrying Value 0 $2,775.09 $97,224.91 1 $3,000.00 $3,889.00 $889.00 $1,886.09 $98,113.91 2 $3,000.00 $3,924.56 $924.56 $961.54 $99,038.46 3 $3,000.00 $3,961.54 $961.54 $0.00 $100,000.00

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