Question

The company issues 4.4% 10-year bonds with a total face amount of $1,000,000 with interest paid semi-annually. The market rate of interest is 4.5%.

n	%	PV	PVA
10	4.50%	0.64393	7.9127
10	4.40%	0.65012	7.9518
20	2.25%	0.64082	15.9637
20	2.20%	0.64712	16.0402

ROUND ANSWERS TO NEARST DOLLAR

What is the issue price of the bond? $_______

What is the interest expense for the first interest payment? $_____

What is the bond liability after the first interest payment? $_______

Answer 1

What is the issue price of the bond? $ 992,021

What is the interest expense for the first interest payment? $ 22.320

What is the bond liability after the first interest payment? $ 992,342

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	$ 1,000,000
Market Rate	4.50%	2.25%		Term (in years)	10
Coupon Rate	4.40%	2.20%		Total no. of interest payments	20

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$   10,00,000	at	2.25%	Interest rate for	20	term payments
PV of $1	0.64082
PV of	$   10,00,000	=	$   10,00,000	x	0.64082	=	$ 640,820	A
Interest payable per term	at	2.20%	on	$ 10,00,000
Interest payable per term	$         22,000
PVAF of 1$	for	2.25%	Interest rate for	20	term payments
PVAF of 1$	15.96371
PV of Interest payments	=	$      22,000.00	x	15.96370	=		$ 351,201	B
				Bond Value (A+B)			$ 992,021

Amortization table
	Period	Cash payment	Interest expense	Premium on Bonds payable	Carrying Value of Bond
	Issued			$        7,979	$         9,92,021
	First interest payment	$         22,000	$       22,320	$            320	$         9,92,342