Question

The interest that is paid to the bondholders is determined by the _________rate and the rate of interest expected by the investors who purchase the bonds is the ___________ rate.

A. Face, Coupon

b. Coupon, Stated

c. Coupon, Market

d. Effective, Market

On January 1, 2014, Robbins Company issued five-year, $500,000 face value, 8% bonds that paid interest semi-annually. The market rate of other similar bonds was 10%. What was the issue price of Robbins Company’s bonds?

a. $500,000

b. $461,390

c. $465,209

d. $615,824

e. None of these answers are correct.

11.  On January 1, 2014, Robbins Company issued five-year, $500,000 face value, 8% bonds that paid interest every June 30th and December 31st. The market rate of other similar bonds was 10%. What was the carrying value of the bonds on June 30th, 2016 assuming that Robbins uses the effective interest method to amortize the bond premium or discount? (Select the closest answer to the one you calculate):

a. $474,619

b. $478,350

c. $527,442

d. $483,226

e. None of these answers are correct.

Answer 1

Question 1

Correct answer---Coupon, Market

Interest on bond is paid at Coupon rate or stated rate , market rate is the rate at which similar bonds are selling in market and it is also what investors are expecting to earn.

Question 2

Correct answer---- b. $461,390

Working

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	$   5,00,000.00
Market Rate	10.00%	5.00%		Term (in years)	5
Coupon Rate	8.00%	4.00%		Total no. of interest payments	10

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$        5,00,000	at	5.00%	Interest rate for	10	term payments
PV of $1	0.61391
PV of	$        5,00,000	=	$       5,00,000	x	0.61391	=	$   3,06,956	A
Interest payable per term	at	4%	on	$   5,00,000
Interest payable per term	$     20,000.00
PVAF of 1$	for	5.0%	Interest rate for	10	term payments
PVAF of 1$	7.72173
PV of Interest payments	=	$           20,000.00	x	7.72173	=		$   1,54,434	B
				Bond Value (A+B)			$   4,61,390

Question 3

Correct answer--- b. $478,350

Working

Amortization table
	Period	Cash payment	Interest expense	Premium on Bonds payable	Carrying Value of Bond
	Issued			$           38,609	$       4,61,391
2014	June	$           20,000	$       23,070	$               3,070	$       4,64,461
	Dec	$           20,000	$       23,223	$               3,223	$       4,67,684
2015	June	$           20,000	$       23,384	$               3,384	$       4,71,068
	Dec	$           20,000	$       23,553	$               3,553	$       4,74,622
2016	June	$           20,000	$       23,731	$               3,731	$       4,78,353
	Dec	$           20,000	$       23,918	$         3,917.63	$       4,82,270
2017	June	$           20,000	$       24,114	$         4,113.51	$       4,86,384
	Dec	$           20,000	$       24,319	$         4,319.19	$       4,90,703
2018	June	$           20,000	$       24,535	$         4,535.15	$ 4,95,238.10
	Dec	$           20,000	$       24,762	$         4,761.90	$ 5,00,000.00