ge.nsex ia weree-H4 tacan eElis M chapter ow Ooarge ceneet , issues Zss, Fr. Geh
ID: 2564138 • Letter: G
Question
ge.nsex ia weree-H4 tacan eElis M chapter ow Ooarge ceneet , issues Zss, Fr. Gehega staiaad.X x x Quatro Co. issues bonds dated January 1, 2016, with a par value of $820,000 The bonds' annual contract rake is 10%, and interest is paid semiannually on June 30 and December 31. The bonds matute in three years. The annual market fase at the date of issuance is 8%, and the bonds are sold for S862.972 1. What is the amount of the premium on these bonds at issuance? 2. How much total bond interest expense will be recognined over the lMe of these bonds amount) to the nearest dollar 0600201 1231/20e 0302017 2012017 06302018Explanation / Answer
Answer to question 1
Step 1: Determine the interest paid by the bond
10%*$820000*6/12= $41000
Step 2: Find Present Value (PV) of the bond
The PV factor is 0.7903
The bond matures in 3 years, with 8% annual market rate and semi annual interest payments.
In the present question; since the payments are semi annual; the table for PV factor has been looked up at 4% for 6periods because of total 6 interest payments in the life of the bond with an effective interest rate of 4%.
0.7903*$820000= $648046
Step 3: Calculate PV of interest payments
The present value of an ordinary annuity of 1 at 4% for 6 periods is 5.2421
In the present question; since the payments are semi annual; the table for PV factor has been looked up at 4% for 6periods because of total 6 interest payments in the life of the bond with an effective interest rate of 4%.
5.2421*$41000= $214926
Step 4: Calculate Bond price
$648046+$214926= $862972
Step 5: Calculate premium at issuance of bonds
$862972-$820000= $42972 Answer.
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