white & Decker Corporation\'s 2018 financial statements included the following i

Question

white & Decker Corporation's 2018 financial statements included the following information in the longterm debt discosure note (s in millions) 2018 $442 Zero-coupon subordinated debentures, due 2033: The disclosure note stated the debenture bonds were issued late in 2013 and have a maturity value of $650 million. The maturity value indicates the amount that White & Decker will pay bondholders in 2033. Each individual bond has a maturity value (face amount) of $1,150. Zero-coupon bonds pay no cash interest during the term to maturity. The company is "accreting" (gradually increasing) the issue price to maturity value using the bonds' effective interest rate computed on an annual basis. (FV of $1. PV of $1. FVA of $1. PVA of $1. FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required 1. Determine the effective interest rate on the bonds. 2. Determine the issue price in late 2013 of a single, $1150 maturity-value bond For all requirements, round your answers to 2 decimal places.) 1. Effective interest rate 2. Issue price

Explanation / Answer

Solution 1:

Maturity value of bond in 2033 = $650 million

Book value of bond in 2018 = $442 million

Time to maturity from 2018 = 15 years

Let effective interest rate is i.

Now present value of $650 million will be equal to $442 million if discounted at i rate of interest.

$650 million * PV factor at i rate at 15 period = $442

PV factor at i rate at 15 period = 0.68

This PV factors fall between 2% and 3%

PV factor at 2% = 0.743015

PV Factor at 3% = 0.641862

Effective interest rate = 2% + (0.743015 - 0.68) / (0.743015 - 0.641862) = 2.62%

Solution 2:

Face value (Maturity value of bond) = 1,150

Original maturity period = 20 years

Issue price of bond = $1,150 * PV Factora t 2.62% for 20 the period

= $1,150 * 0.596156 = $685.58

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