Question
In: Accounting
On January 1, 2018, Rare Bird Ltd. purchased 15% bonds dated January 1, 2018, with a...
On January 1, 2018, Rare Bird Ltd. purchased 15% bonds dated January 1, 2018, with a face amount of $28 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 14%. 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
| Particulars | Cash flow | Discount factor | Discounted cash flow | |
| Interest payments-Annuity (7%,20 periods) | 2,100,000.0 | 10.5940 | 22,247,429.92 | |
| Principle payments -Present value (7%,20 periods) | 28,000,000 | 0.2584 | 7,235,732.08 | |
| A | Bond price | 29,483,161.99 | ||
| Face value | 28,000,000.00 | |||
| Premium/(Discount) | 1,483,161.99 | |||
| Interest amount: | ||||
| Face value | 28,000,000 | |||
| Coupon/stated Rate of interest | 15.00% | |||
| Frequency of payment(once in) | 6 months | |||
| B | Interest amount | 28000000*0.15*6/12= | 2100000 | |
| Present value calculation: | ||||
| yield to maturity/Effective rate | 14.00% | |||
| Effective interest per period(i) | 0.14*6/12= | 7.000% | ||
| Number of periods: | ||||
| Ref | Particulars | Amount | ||
| a | Number of interest payments in a year | 2 | ||
| b | Years to maturiy | 10.0 | ||
| c=a*b | Number of periods | 20 |
Bond price is 29,483,161.99
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