Question
In: Accounting
On December 31, 2019, Repsol Corp issued $1,400,000, 9%, 5-year bonds. Interest is payable semiannually on...
On December 31, 2019, Repsol Corp issued $1,400,000, 9%, 5-year
bonds. Interest is payable semiannually on June 30 and December 31.
The corporation uses the effective interest method of amortizing
bond premium or discount. Using a financial calculator or excel,
estimate the issue price of the bonds under the following three
assumptions: (1) Market Rate is 9%
(2) Market Rate is 8%
Solutions
Expert Solution
| 1.) | Market rate | 9% | ||
| Amount $ | ||||
| Present of value of Maturity | 901,499 | =PV(0.045,10,0,-1400000) | ||
| Add: Present value of Interest payment | 498,501 | =PV(0.045,10,-63000,0) | ||
| Issue price of bond | 1,400,000 | |||
| *63,000 ( 1,400,000 x 9% x 1/2 ) | ||||
| 2.) | Market rate | 8% | ||
| Amount $ | ||||
| Present of value of Maturity | 945,790 | =PV(0.04,10,0,-1400000) | ||
| Add: Present value of Interest payment | 510,986 | =PV(0.04,10,-63000,0) | ||
| Issue price of bond | 1,456,776 | |||
| *63,000 ( 1,400,000 x 9% x 1/2 ) | ||||
| 3.) | Assuming Market rate | 10% | ||
| Amount $ | ||||
| Present of value of Maturity | 859,479 | =PV(0.05,10,0,-1400000) | ||
| Add: Present value of Interest payment | 486,469 | =PV(0.05,10,-63000,0) | ||
| Issue price of bond | 1,345,948 | |||
| *63,000 ( 1,400,000 x 9% x 1/2 ) | ||||
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