On January 1, Year One, the Pulaski Corporation issues bonds with a face value of $1...

On January 1, Year One, the Pulaski Corporation issues bonds with a face value of $1 million. These bonds come due in twenty years and pay an annual stated interest rate (each December 31) of 5 percent. An investor offers to buy the entire group of bonds for an amount that will yield an effective interest rate of 10 percent per year. Company officials negotiate and are able to reduce the effective rate by 2 percent to 8 percent per year. The present value of $1 at a 10 percent interest rate in twenty years is $0.14864. The present value of an ordinary annuity of $1 at a 10 percent interest rate over twenty years is $8.51356. The present value of $1 at an 8 percent interest rate in twenty years is $0.21455. The present value of an ordinary annuity of $1 at an 8 percent interest rate over twenty years is $9.81815. a. As a result of the 2 percent reduction in the annual effective interest for this bond, what is the decrease in the amount of interest expense that Pulaski recognizes in Year One? b. As a result of the 2 percent reduction in the annual effective interest for this bond, what is the decrease in the amount of interest expense that Pulaski recognizes in Year Two?

Solutions

Expert Solution

WE USE DISCOUNTING FORMULA TO FIND INTEREST RATE PV,BY USING PVF FORMULA

HERE IN FOLLOWING TABLE YOU CAN FIND THE DIFFERENCE OF EVERY YEAR.
PVF = 1/(1+R)^T
T=1,2,3,4........20

INT AMOUNT	INT RATE	PVF	YEAR	INT*PVF	INT AMOUNT	INT RATE	PVF	YEAR	INT*PVF	DIFFERENCE
50000	0.1	0.909090909	1	45454.54545	50000	0.08	0.925925926	1	46296.2963	841.7508418
50000	0.1	0.826446281	2	41322.31405	50000	0.08	0.85733882	2	42866.94102	1544.626966
50000	0.1	0.751314801	3	37565.74005	50000	0.08	0.793832241	3	39691.61205	2125.872006
50000	0.1	0.683013455	4	34150.67277	50000	0.08	0.735029853	4	36751.49264	2600.819872
50000	0.1	0.620921323	5	31046.06615	50000	0.08	0.680583197	5	34029.15985	2983.093699
50000	0.1	0.56447393	6	28223.6965	50000	0.08	0.630169627	6	31508.48134	3284.784841
50000	0.1	0.513158118	7	25657.90591	50000	0.08	0.583490395	7	29174.51976	3516.613852
50000	0.1	0.46650738	8	23325.36901	50000	0.08	0.540268885	8	27013.44423	3688.075215
50000	0.1	0.424097618	9	21204.88092	50000	0.08	0.500248967	9	25012.44836	3807.567438
50000	0.1	0.385543289	10	19277.16447	50000	0.08	0.463193488	10	23159.6744	3882.509933
50000	0.1	0.350493899	11	17524.69497	50000	0.08	0.428882859	11	21444.14297	3919.447993
50000	0.1	0.318630818	12	15931.54089	50000	0.08	0.397113759	12	19855.68793	3924.147047
50000	0.1	0.28966438	13	14483.21899	50000	0.08	0.367697925	13	18384.89623	3901.677247
50000	0.1	0.263331254	14	13166.56272	50000	0.08	0.340461041	14	17023.05207	3856.489353
50000	0.1	0.239392049	15	11969.60247	50000	0.08	0.315241705	15	15762.08525	3792.48278
50000	0.1	0.217629136	16	10881.45679	50000	0.08	0.291890468	16	14594.52338	3713.066589
50000	0.1	0.197844669	17	9892.233445	50000	0.08	0.270268951	17	13513.44757	3621.214127
50000	0.1	0.17985879	18	8992.939495	50000	0.08	0.250249029	18	12512.45146	3519.51196
50000	0.1	0.163507991	19	8175.399541	50000	0.08	0.231712064	19	11585.6032	3410.203658
50000	0.1	0.148643628	20	7432.181401	50000	0.08	0.214548207	20	10727.41037	3295.228969
	0.1	8.51356372					9.818147407

ekkarill92 answered 1 year ago

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