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On January 1, Year1, Boston Group issued $500,000 par value, 12% three-year bonds when the market...

On January 1, Year1, Boston Group issued $500,000 par value, 12% three-year bonds when the market rate of interest was 8%. Interest is payable semiannually on December 31. The following present value information is available:

	4%	8%
Present Value of $1 (n=5)	0.7903	0.6302
Present value of an ordinary annuity (n=5)	5.2421	4.6229
Present Value of $1 (n=3)	0.8890	0.7938
Present value of an ordinary annuity (n=5)	2.7751	2.5771

What amount is the value of net bonds payable at the end of year 1?

Expert Solution

Issue Price of the Bond

Face Value = $500,000

Semi-annual Coupon Amount = $30,000 [$500,000 x 12.00% x ½]

Semi-annual Yield to Maturity = 4.00% [8.00% x ½]

Maturity Period = 6 Years [3 Years x 2]

Therefore, the Issue Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $30,000[PVIFA 4.00%, 6 Years] + $500,000[PVIF 4.00%, 6 Years]

= [$30,000 x 5.2421] + [$500,000 x 0.7903]

= $157,263 + $395,150

= $552,413

The Issue Price of the Bond will be $552,413.

Bond amortization schedule for the first two semi-annual periods

Date	Cash paid at 6.00% on $500,000	Interest Exp at 4.00% on Previous period carrying value	Change in Carrying Value	Carrying Value

Jan 1, Year 1	-	-	-	552,413
June 30, Year 1	30,000	22,097	7,903	544,510
Dec 31, Year 1	30,000	21,780	8,220	536,290

Therefore, the value of net bonds payable at the end of year 1 will be $536,290 (Aprrox)

ekkarill92 answered 2 years ago

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