13-1 The initial proceeds per bond, the size of the issue, the initial maturity
ID: 2698135 • Letter: 1
Question
13-1 The initial proceeds per bond, the size of the issue, the initial maturity of the bond, and the years remaining to maturity are shown in the following table for a number of bonds. In each case, the firm is in the 40 percent tax bracket, and the bond has a $1,000 par value.
Bond Proceeds per Size of Initial Maturity Years Remaining
Bond Issue of Bond to Maturity
A $985 10,000 bonds 20 Years 15 years
B 1,025 20,000, 25, 16
C 1,000 22,500, 12, 9
D 960 5,000, 25, 15
E 1,035 10,000, 30, 16
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 from the unamortized discount associated with the retirement now of each of these bonds, using the values developed in part (d).
Explanation / Answer
A) discount / premium = proceeds per bond - par value
A is sold at discount
B issold at premium
C is sold at par value
D is sold at discount
E is sold at premium
b)
totaldiscount of A= 15*10000 = 150000
total premium of B = 25 * 20000 = 500000
zero for C
total discount of D = 40* 5000 = 200000
total premium of E = 35 * 10000 = 350000
c) annual amount amortized for A= 150000/20 = 7500
annual amount amortized for B = 500000/25 = 20000
annual amount amortized for C = 0
annual amount amortized for D = 200000/25 = 8000
annual amount amortized for E = 350000/30 = 11666.67
d) formula would be
annual amortization * number of years remaining
e) formula would be
after tax cash flows = -(unamortized * size of issue * crporate tax rate)
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