Question

James River Enterprises issued a bond on January 1, 1996, with a face (maturity) value of $1,000 and a coupon rate of 8% per year. The bond paid interest semiannually, and matured in three years. Prepare an amortization table in the format shown below using the effective interest method, under each of the following circumstances: a. The market rate on the date of issue was 8%. b. The market rate on the date of issue was 10%. c. The market rate on the date of issue was 6%. Please answer (for each of the three above cases) what would be the price, which will be paid and what will be the gain (or loss) if any for James River Enterprises, from this transaction. a. The price for the bond repurchase is: , the resulting gain/loss is: b. The price for the bond repurchase is: , the resulting gain/loss is: c. The price for the bond repurchase is: , the resulting gain/loss is:

Answer 1

c.When Bond are issued at premium
Issue Price of Bond =40*PVAF(3%,6) + 1,000*PVIF(3%,6) =40*5.41719 + 1,000*0.83748 =$1,054.17
Period	Bonds Payable, Net(Op.Bal)	Interest Expense(@3% on Closing value of Bonds payable)	Cash Paid(@4% on Face value of $1,000)	Amortization amount	Unamortized amount	Bonds Payable, Net(Cl.Bal)
01-Jan-96			40.00		54.17	1,054.17
30-Jun-96	1,054.17	31.63	40.00	8.37	45.80	1,045.80
31-Dec-96	1,045.80	31.37	40.00	8.63	37.17	1,037.17
30-Jun-97	1,037.17	31.12	40.00	8.88	28.28	1,028.28
31-Dec-97	1,028.28	30.85	40.00	9.15	19.13	1,019.13
30-Jun-98	1,019.13	30.57	40.00	9.43	9.71	1,009.71
31-Dec-98	1,009.71	30.29	40.00	9.71	(0.00)	1,000.00
The 2nd part of the question is not clear, assuming that the market rate is 8% and the remaining period is 2 years(4 payments) I am solving it.Means that Bond is repurchased on Jan 1,1997
Bond Price on Jan 1,1997 =40*PVAF(4%,4) + 1,000*PVIF(4%,4) =40*3.6299 + 1,000*0.854804 =$1,000
(a)Par value Bond
Price of Bond =$1,000
Gain on Bond Repurchase =$1,000 - $1,000 =NIL
(b)Discount Bond
Price of Bond =$949.24
Loss on Bond Repurchase =$949.24 - $1,000 =$50.76
(c)Premium Bond
Price of Bond =$1,054.17
Gain on Bond Repurchase =$1,054.17 - $1000 =$54.17