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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 2 years ago
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