Question

In: Accounting

The Accounting Club recently issued $1,500,000 of 10- year, 9% bonds at an effective interest rate...

The Accounting Club recently issued $1,500,000 of 10- year, 9% bonds at an effective interest rate of 10%. Bond interest is payable annually.

Required:

Create a stright line amortization and effective interest schedule in excel. PLEASE SHOW THE FORMULAS THAT WERE USED TO CALCULATE EACH VALUE.

Amortization Schedule- Stright Line

Year Cash Paid Amortization Interest Exp. Disc./Prem Carrying Value

0

1

2

3

4

5

6

7

8

9

10

11

12

Amortization Schedule- Effective Interest Method

Year Cash Paid Amortization Interest Exp. Disc./Prem Carrying Value

0

1

2

3

4

5

6

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9

10

11

12

Expert Solution

The bonds were issued at a coupon rate of 9%, whereas the effective rate is 10%. This clearly means that the amount received via issuance of bonds will be lesser than its face value. So, we first need to calculate the amount received.

Formula: Bond Value = C*{[1-(1+(YTM))^-t/(YTM)] + [F / (1+ (YTM))^t]

Where,
B₀ = the bond price
C = the annual coupon payment, = $1,500,000 x 9% = $135,000
F = the face value of the bond, = $1,500,000
YTM = the yield to maturity on the bond, = 10%
t = the number of years remaining until maturity = 10

Bond Value = $135,000*{[1-(1+(0.10))^-10/(0.10)] + [$1,500,000 / (1+ (0.10))¹⁰] =$1,407,831.49

So, the amount received in the bond issue is $1,407,831.49

*Effective Interest Method Amortization Schedule*
Period	Opening	Interest	Payment	Closing	Discount
1	$1,407,831.49	$140,783.15	$135,000.00	$1,413,614.64	-$5,783.15
2	$1,413,614.64	$141,361.46	$135,000.00	$1,419,976.11	-$6,361.46
3	$1,419,976.11	$141,997.61	$135,000.00	$1,426,973.72	-$6,997.61
4	$1,426,973.72	$142,697.37	$135,000.00	$1,434,671.09	-$7,697.37
5	$1,434,671.09	$143,467.11	$135,000.00	$1,443,138.20	-$8,467.11
6	$1,443,138.20	$144,313.82	$135,000.00	$1,452,452.02	-$9,313.82
7	$1,452,452.02	$145,245.20	$135,000.00	$1,462,697.22	-$10,245.20
8	$1,462,697.22	$146,269.72	$135,000.00	$1,473,966.94	-$11,269.72
9	$1,473,966.94	$147,396.69	$135,000.00	$1,486,363.64	-$12,396.69
10	$1,486,363.64	$148,636.36	$135,000.00	$1,500,000.00	-$13,636.36

Formulas to create amortization

Interest = Opening Balance*10%
Payment = $1,500,000*9% = $135,000
Closing Balance = Opening Balance + Interest – Payment
Discount = Payment – Interest

Straight-Line Method Amortization Schedule
Period	Opening	Interest	Payment	Closing	Discount
1	$1,407,831.49	$140,783.15	$135,000.00	$1,413,614.64	$9,216.85
2	$1,413,614.64	$141,361.46	$135,000.00	$1,419,976.10	$9,216.85
3	$1,419,976.10	$141,997.61	$135,000.00	$1,426,973.71	$9,216.85
4	$1,426,973.71	$142,697.37	$135,000.00	$1,434,671.08	$9,216.85
5	$1,434,671.08	$143,467.11	$135,000.00	$1,443,138.19	$9,216.85
6	$1,443,138.19	$144,313.82	$135,000.00	$1,452,452.01	$9,216.85
7	$1,452,452.01	$145,245.20	$135,000.00	$1,462,697.21	$9,216.85
8	$1,462,697.21	$146,269.72	$135,000.00	$1,473,966.93	$9,216.85
9	$1,473,966.93	$147,396.69	$135,000.00	$1,486,363.63	$9,216.85
10	$1,486,363.63	$148,636.36	$135,000.00	$1,499,999.99	$9,216.85

Formulas to create amortization

Interest = Opening Balance*10%
Payment = $1,500,000*9% = $135,000
Closing Balance = Opening Balance + Interest – Payment
Discount = ($1,500,000 - $1,407,831.49)/10 = $9,216.85

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