On June 30, 2018, Singleton Computers issued 6% stated rate bonds with a face am
ID: 2598970 • Letter: O
Question
On June 30, 2018, Singleton Computers issued 6% stated rate bonds with a face amount of $200 million. The bonds mature on June 30, 2033 (15 years). The market rate of interest for similar bond issues was 5% (2.5% semiannual rate). Interest is paid semiannually (3%) on June 30 and December 31, beginning on December 31, 2018. (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 price of the bonds on June 30, 2018. (Enter your answers in whole dollars. Round percentage answers to one decimal place. Round your final answers to nearest whole dollar amount.)
2. Calculate the interest expense Singleton reports in 2018 for these bonds using the effective interest method. (Enter your answers in whole dollars. Round your final answers to nearest whole dollar amount.)
Explanation / Answer
1) Market interest rate = 5% Market interest rate for a semiannual period = 5% / 2 = 2.5% r = 0.06 (per semiannual period), n = 10 (semiannual periods) Present value of principal = $200 million x Present value factor for a single payment (2.5%, 10 periods) = $200 million x 0.4767 = $95.3485 Interest payment each semiannual period = $200 million x 3% = $6 million (Coupon rate for a semiannual period = 6% / 2 = 3%.) Present value of interest payments = Interest payment each semiannual period x Present value factor for an ordinary annuity (2.5%, 10 periods) = ($200 million x 3%) x 20.9303 = $125.5818 Price of bonds = Present value of principal + Present value of interest payments = $95.3485+$125.5818 = $220.9303 2) Period-End Cash Interest Paid Bond Interest Expense Premium Amortization Carrying Value 06/30/2018 220.93 12/31/2018 6 5.5233 0.4767 220.45
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