Dean Corp. issued $500,000 of 7% debentures on January 1, 2018, with interest payable semiannually on...

Dean Corp. issued $500,000 of 7% debentures on January 1, 2018, with interest payable semiannually on June 30 and December 31 to yield 6%. The bonds mature in 5 years.

Prepare an amortization table for the bonds. Make sure you provide column headers. Excel would be the best way to prepare this. Write out in pencil your labelled calculations for the first two interest payments.

Write the entries for the first two payments.

Why would the issuer not want to be in this situation?

Expert Solution

	CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY

	Step 1 : Calculation of Annual Coupon Payments
	Par value of the bond issued is =			$5,00,000	Million
	Annual Coupon %			7.00%
	Annual Coupon Amount			$35,000.00	Million
	Semi Annual Coupon Amount			$17,500.00	Million

	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 5 years
	Interest is paid semi annyally so total period = 5 Years * 2 = 10 Periods

	Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds

	Market rate of interest or Yield to Maturity or Required Return = 6%
	Bonds interest is paid semi annualy means so discounting factor = 6.0 % /2= 3.00 %

	PVF = 1 / Discount rate = 1/ 1.03
	Result of above will again divide by 1.03 , repeat this lat period

	Period	Interest	Amount (In Million)	PVF @ 3.0%	PresentValue
	1	Interest	$17,500	0.9709	$16,990.29
	2	Interest	$17,500	0.9426	$16,495.43
	3	Interest	$17,500	0.9151	$16,014.98
	4	Interest	$17,500	0.8885	$15,548.52
	5	Interest	$17,500	0.8626	$15,095.65
	6	Interest	$17,500	0.8375	$14,655.97
	7	Interest	$17,500	0.8131	$14,229.10
	8	Interest	$17,500	0.7894	$13,814.66
	9	Interest	$17,500	0.7664	$13,412.29
	10	Interest	$17,500	0.7441	$13,021.64
	10	Bond Principal Value	$5,00,000	0.7441	$3,72,046.96
		Total			$5,21,325.51

		Current Bonds Price =			$5,21,326



	answer =2)

	Issue price of the bond=			$5,21,326
	Par Value of the bonds =			$5,00,000
	Discount to be amortized =			$21,326
	Amortized in 10 Equal installment = ($ 21,326 /10 Priods) =			$2,132.55


				First Payment
		Interest Expenses of First Payment		$ 17,500
		Less : Amortization of Premium		$ 1,860
		Total interest =		$ 15,640

				Dece, 31 2014
		Interest Expenses of Second Payment		$ 17,500
		Less : Amortization of Premium		$ 1,916
		Total interest =		$ 15,584

	Journal Entries
	Transaction	Account Title and explanation	Debit	Credit

	First Payment	Interest Expenses	$ 15,640
		Premium on issuance on Bonds	$ 1,860
		To Cash		$ 17,500


	Second Payment	Interest Expenses	$ 15,584
		Premium on issuance on Bonds	$ 1,916
		To Cash		$ 17,500



	Working notes
	EFFECTIVE - INTEREST AMORTIZATION SCHEDULE
	MARKET RATE OF INTEREST IS 6% AND BOND INTEREST IS 7%
	Date	Interest payment on face value	Interest Expenses (Cash paid - Decrease in Carrying value)	Amortization expenses	Debit Balance in bond discount	Credit Balance in acct payable	book Value of the bond
0	01-Jan	$0.00	$0.00	$0.00	$21,325.51	$5,00,000.00	$5,21,325.51
1	Jun-30	$17,500.00	$15,639.77	$1,860.23	$23,185.74	$5,00,000.00	$5,19,465.27
2	Dec-31	$17,500.00	$15,583.96	$1,916.04	$25,101.78	$5,00,000.00	$5,17,549.23
3	Dec-31	$17,500.00	$15,526.48	$1,973.52	$27,075.31	$5,00,000.00	$5,15,575.71
4	Dec-31	$17,500.00	$15,467.27	$2,032.73	$29,108.04	$5,00,000.00	$5,13,542.98
5	Dec-31	$17,500.00	$15,406.29	$2,093.71	$31,201.75	$5,00,000.00	$5,11,449.27
6	Dec-31	$17,500.00	$15,343.48	$2,156.52	$33,358.27	$5,00,000.00	$5,09,292.75
7	Dec-31	$17,500.00	$15,278.78	$2,221.22	$35,579.49	$5,00,000.00	$5,07,071.53
8	Dec-31	$17,500.00	$15,212.15	$2,287.85	$37,867.34	$5,00,000.00	$5,04,783.67
9	Dec-31	$17,500.00	$15,143.51	$2,356.49	$40,223.83	$5,00,000.00	$5,02,427.18
10	Dec-31	$17,500.00	$15,072.82	$2,427.18	$42,651.01	$5,00,000.00	$5,00,000.00

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