P13-1 The initial proceeds per bond, the size of the issue, initial maturity of
ID: 2647212 • Letter: P
Question
P13-1 The initial proceeds per bond, the size of the issue, initial maturity of the bond, and the years remaining to maturity are shown in following table for a number of bonds.
Each bond has a $1,000 par value, and the issuing firm, is in the 35% tax bracket.
Bond
Proceeds per Bond
Size of Issue
Initital Maturity of Bond
Years Remaining to Maturity
A
$975
50,000 Bonds
10 Years
5 Years
B
1,020
25000 Bonds
20 Years
15 Years
D
1,000
100000 Bonds
25 Years
12 Years
a. Indicate whether each bond was sold at a discount, at a premium, or at its par value.
b. Determine the total discount or premium for each issue.
c. Determine the annual amount of discount or premium amortized for each bond.
d. Calculate the unamortized discount or premium for each bond.
e. Determine the after-tax cash flow associated with the retirement now of each of these bonds, using the values developed in part (d).
P13-1 The initial proceeds per bond, the size of the issue, initial maturity of the bond, and the years remaining to maturity are shown in following table for a number of bonds.
Each bond has a $1,000 par value, and the issuing firm, is in the 35% tax bracket.
Bond
Proceeds per Bond
Size of Issue
Initital Maturity of Bond
Years Remaining to Maturity
A
$975
50,000 Bonds
10 Years
5 Years
B
1,020
25000 Bonds
20 Years
15 Years
D
1,000
100000 Bonds
25 Years
12 Years
a. Indicate whether each bond was sold at a discount, at a premium, or at its par value.
b. Determine the total discount or premium for each issue.
c. Determine the annual amount of discount or premium amortized for each bond.
d. Calculate the unamortized discount or premium for each bond.
e. Determine the after-tax cash flow associated with the retirement now of each of these bonds, using the values developed in part (d).
Explanation / Answer
a. A bond is said to be sold at a discount if issue price <par value and at a premium if issue price > par value. Proceeds that the company receives is the issue price of the bond. To assess whether the bond was sold at a discount or premium, please refer to the table below:
b. Total discount/premium per bond = Issue price - Par value
If negative, the amount is discount else premium
c. Annual amount of discount or premium amortised = Total discount or premium / Initial maturity of bond
In this context please note that
Premiums added to earnings each year, so increase taxable income and taxes paid;
Discounts deducted from earnings each year, so reduce taxable income and taxes paid
d. Unamortised discount or premium for each bond = Total discount/premium per bond - Discount/premium amortised over the life expired
Bond Proceeds per bond / Issue price Par value Situation At discount/premium A $975 $1,000 Issue price < Par value Discount B $1,020 $1,000 Issue price > Par value Premium D $1,000 $1,000 Issue price = Par value At parRelated Questions
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