Question

In: Accounting

Company Y is issuing bonds. They plan to issue 10,000, $1000 par, 6% bonds that pays...

Company Y is issuing bonds. They plan to issue 10,000, $1000 par, 6% bonds that pays semi-annual for 5 years. If the bond price is $1020, what is the market annual rate of return? (Percentage, 2 dp)

Solutions

Expert Solution

Bond Amortization Schedule
Effective Interest Method
Period Semi-Annual Interest payment ( Face Value @3% ) - A Interest Expense (Carrying amount @ 2.77% ) -B Amortization of Premium C = ( A-B ) Bond Premium ( Period opening Amount - C ) Carrying Amount $
0 20              1,020
1 30                                    28                                        2                                        18              1,018
2 30                                    28                                        2                                        16              1,016
3 30                                    28                                        2                                        15              1,015
4 30                                    28                                        2                                        13              1,013
5 30                                    28                                        2                                        11              1,011
6 30                                    28                                        2                                          9              1,009
7 30                                    28                                        2                                          7              1,007
8 30                                    28                                        2                                          5              1,005
9 30                                    28                                        2                                          2              1,002
10 30                                    28                                        2                                          0              1,000
The market annual rate of return is 5.54%.

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