Question

In: Accounting

Baker Company issued $6 million of five-year 12% bonds on January 1 with interest payable on...

Baker Company issued $6 million of five-year 12% bonds on January 1 with interest payable on June 30 and December 31 each year. The bonds sold to yield 16%. Baker Company's banker is Ted who provides bond valuation as a part of her banking services

(a) Calculate the value of the bond when it was sold.

(b) What do you call the difference between the bond face value and the amount it was issued for?

Solutions

Expert Solution

Requirement a

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

Annual Rate

Applicable rate

Face Value

$         60,00,000.00

Market Rate

16.00%

8.00%

Term (in years)

5

Coupon Rate

12.00%

6.00%

Total no. of interest payments

10

Calculation of Issue price of Bond

Bond Face Value

Market Interest rate (applicable for period/term)

PV of

$     60,00,000

at

8.00%

Interest rate for

10

term payments

PV of $1

0.46319

PV of

$     60,00,000

=

$     60,00,000

x

0.46319

=

$     27,79,160.93

A

Interest payable per term

at

6.000%

on

$ 60,00,000

Interest payable per term

$ 3,60,000.00

PVAF of 1$

for

8.0%

Interest rate for

10

term payments

PVAF of 1$

6.71008

PV of Interest payments

=

$        3,60,000.00

x

6.71008

=

$     24,15,629.30

B

Bond Value (A+B)

$     51,94,790.23

Value of the bond when it was sold = $ 51,94,790.23 or $ 51,94,790

.

.

Requirement b

When Bond is issued at more than its face value then the difference between face value and amount it was issued for is known as Premium on bond.

When Bond is issued at less than its face value then the difference between face value and amount it was issued for is known as Discount on bond.

In the above case the difference between face value and issue value of bond is discount because bond coupon rate is less than market rate.

ekkarill92 answered 2 years ago
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