Question

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) Were the bonds issued at a discount, at par, or at a premium?

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

Answer 1

Ans:

Face Value of Bond: $1,000

Interest Rate : 8%

Periodic Interest Rate : 8%/2 = 4%

Periodic Interest : 4%*1,000 = $40

Life 2 Years

Number of periods : 2*2 = 4

Market rate : 12%

Periodic Market rate (6 months) : 6%

Annuity Factor @6% for 4 Periods : 3.46511 (Using factor table)

PV Factor @6% for 4 Periods : 0.79209 (Using factor table)

Value of Bond : Annuity Factor* Periodic Interest + PV Factor* Face Value of Bond

= 3.46511 * $40 + 0.79209*$1,000 = $931

a.

Price of the Bond : $931

b.

Since Market price is lower than Face value, bonds are issued at Discount.

c.

Using Straight Line method Discount of $69 ($1,000 - $931) to be amortised equally over 4 Periods.

Discount to be amortised on June 30 : $69/4 = $17.25 or $17

Interest Expesne to be recorded on June 30 : Periodic Interest + Discount amortised

= $40 + $17 = $57

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