Question

The manager of a small hotel resort is considering expansion. He would like to issue bonds but do not quite understand why he may or may not receive what amount of money is stated on the face of the bond but he has to repay what is on the face of the face bond. Write a report to the manager explaining the market forces that determine how much money will be collected. Also explain how the interest payment on bonds are calculated and paid. write a report with 800 words explaining the market forces that determine how much money will be collected and how the interest payment on bonds are calculated and paid.

Answer 1

Answer:

Computing interest cost for bonds sold at a markdown

We should begin first with bonds issued at a markdown. Little lodging hotel. sells $100,000 of five-year bonds with a semiannual coupon of 5%, or 10% every year. Speculators think the organization is hazardous, so they request a 12% respect development for purchasing these bonds.

The initial step is to utilize a fund number cruncher to figure how much the organization will get from selling these securities by entering the accompanying data into a budgetary adding machine:

Future esteem: $100,000 (The assumed worth of the bonds).

Number of periods: 10 (5 years of semiannual installments).

Installment: $5,000 (5% semiannual coupon increased by the assumed worth).

Rate: 6% (12% respect development isolated by two semiannual periods).

Fathom for the present esteem.

The outcome is that the organization gets just $92,639.91 from selling these bonds. In this way, the bonds are sold at a rebate of $7,360.09 ($100,000 in assumed worth short continues of $92,639.91).

Intrigue cost calculations

At regular intervals, little lodging hotels. will normally need to pay its bondholders money coupons of $5,000. This is plainly intrigue cost. Be that as it may, it isn't the main sum recorded as intrigue cost on a bond sold at a markdown.

The markdown on the obligations of $7,360.09 is an extra expense of financing. GAAP necessitates that the markdown is amortized into intrigue cost after some time.

To ascertain the intrigue cost for the primary time frame, we take the $92,639.91 conveying estimation of the securities and increase it significantly the respect development. This outcomes in $92,639.91*(0.12/2)=$5,558.39 of intrigue cost for the main semiannual period.

The real money premium paid was just $5,000 - the coupon increased by the security's presumptive worth. In any case, intrigue cost likewise incorporates the $558.39 of amortized rebate in the initial a half year.