Question

Question: Bonds Payable

On January 1, 2019, ABC Company issued bonds with a face value of $1,000 and a coupon rate of 8 percent. The bonds mature in 2 years and pay interest on June 30 and December 31 each year. The market rate is 12% annually. The present value of $1 table and the present value of annuity of $1 table are provided on the next page.Round your final answers to the nearest whole dollar.

(1) What is the issue price of the bonds? (2 points)

(2) Were the bonds issued at a discount, at par, or at a premium? (1 point)

(3) Suppose ABC uses straight-line amortization method, what is the interest expense to be recorded on June 30, 2019? (2 points)

Answer 1

Solution: 1
	CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY
	Step 1 : Calculation of Semi Annual Coupon Payments
	Par value of the bond issued is   =		$1,000
	Annual Coupon %			8.00%
	Annual Coupon Amount			$80
	Semi Annual Coupon Amount		$40
	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 2 years
	Interest is paid semi annyally so total period = 15 Years * 2 = 30 Periods
	Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
	Market rate of interest or Yield to Maturity or Required Return = 12%
	Bonds interest is paid semi annualy means so discounting factor = 12 % /2= 6 %
	PVF = 1 / Discount rate = 1/ 1.06
	Result of above will again divide by 1.06 , repeat this lat period
	Period	Interest	Amount (In Million)	PVF @ 6%	PresentValue
	1	Interest	$40.00	0.9434	$37.74
	2	Interest	$40.00	0.8900	$35.60
	3	Interest	$40.00	0.8396	$33.58
	4	Interest	$40.00	0.7921	$31.68
	4	Bond Principal Value	$1,000.00	0.7921	$792.09
		Total			$930.70
	Answer =	Current Bonds Price =		$931
Solution: 2
	Bonds are issued at discount at discount of $ 69 per bond
	Par value of the Bonds =		$1,000
	Issue Price of the bonds		$931
	Discount value		$69
Solution: 3
	Discount value of $ 69 can be amortized in 4 period of 2 year
	Discount amortized = $ 69 / 4 =	$17
	Calculation of interest expenses as on June 30, 2019
	Coupon amount paid on par value =	$40
	Add: Discount on amortization	$17
	Interest Expenses		$57
	Answer = $ 57