Question
In: Accounting
On January 1, 2018, Shirley Corporation purchased 12% bonds dated January 1, 2018, with a face...
On January 1, 2018, Shirley Corporation purchased 12% bonds dated January 1, 2018, with a face amount of $21 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 16%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Required: Determine the price of the bonds at January 1, 2018.
Solutions
Expert Solution
|
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 |
$ 21,000,000.00 |
||
|
Market Rate |
16.00% |
8.00% |
Term (in years) |
10 |
|
|
Coupon Rate |
12.00% |
6.00% |
Total no. of interest payments |
20 |
|
Calculation of Issue price of Bond |
||||||||
|
Bond Face Value |
Market Interest rate (applicable for period/term) |
|||||||
|
PV of |
$21,000,000.00 |
at |
8.0% |
Interest rate for |
20 |
term payments |
||
|
PV of $1 |
0.21454821 |
|||||||
|
PV of |
$21,000,000.00 |
= |
$ 21,000,000.00 |
x |
0.214548207 |
= |
$ 4,505,512.36 |
A |
|
Interest payable per term |
at |
6.0% |
on |
$ 21,000,000.00 |
||||
|
Interest payable per term |
$ 1,260,000.00 |
|||||||
|
PVAF of 1$ |
for |
8.0% |
Interest rate for |
20 |
term payments |
|||
|
PVAF of 1$ |
9.818147407 |
|||||||
|
PV of Interest payments |
= |
$ 1,260,000.00 |
x |
9.818147407 |
= |
$12,370,865.73 |
B |
|
|
Bond Value (A+B) |
$ 16,876,378.09 |
|||||||
Issue price of Bond = $ 16,876,378.09 or $16,876,378
Market rate is more than coupon rate hence bond is issued at discount.
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