Question

In: Accounting

1. On January 1, 2011, Michael’s Incorporated issued $8,000,000 of 10-year bonds at a 11% stated...

1. On January 1, 2011, Michael’s Incorporated issued $8,000,000 of 10-year bonds at a 11% stated

interest rate to be paid annually. Calculate the issuance price if the market rate of interest is 9%

(Choose the best answer).

(F) $8,000,000

(G) $9,023,840

(H) $8,923,840

(I) $11,376,000

(J) $9,975,023

2.

On November 1, 2016, O&R Ltd. sold 300, $1,000, ten-year, 7% bonds at 96. The bonds were dated

November 1, 2016, and interest is payable each November 1 and May 1. The amount of discount

amortization at each semi-annual interest date would be (assume straight-line amortization). (Choose

the best answer)

(F) $1,019

(G) $12,000

(H) $1,200

(I) $600

(J) $900

3.

A company is scheduled to make annual payments to a pension fund at the end of the next three

years. The present value of those payments is $100,000. Which of the following amounts is nearest the

amount which must be paid annually if the fund is projected to earn interest at the rate of 8% per

year?

(A) $33,333

(B) $26,461

(D) $41,990

(D) $38,803

(E) $39,403

Solutions

Expert Solution

Answer to Question 1:

Face Value = $8,000,000

Annual Coupon Rate = 11%
Annual Coupon = 11% * $8,000,000
Annual Coupon = $880,000

Annual Interest Rate = 9%
Time to Maturity = 10 years

Issue Price = $880,000 * PVIFA(9%, 10) + $8,000,000 * PVIF(9%, 10)
Issue Price = $880,000 * (1 - (1/1.09)^10) / 0.09 + $8,000,000 / 1.09^10
Issue Price = $880,000 * 6.4177 + $8,000,000 * 0.4224
Issue Price = $9,026,776

So, closet issuance price is $9,023,840

Answer to Question 2:

Face Value of Bonds = 300 * $1,000
Face Value of Bonds = $300,000

Issue Price of Bonds = 96% * $300,000
Issue Price of Bonds = $288,000

Annual Coupon Rate = 7%
Semiannual Coupon Rate = 3.50%
Semiannual Coupon = 3.50% * $300,000
Semiannual Coupon = $10,500

Discount on Bonds = Face Value of Bonds - Issue Price of Bonds
Discount on Bonds = $300,000 - $288,000
Discount on Bonds = $12,000

Time to Maturity = 10 years
Semiannual Period to Maturity = 20

Semiannual Amortization of Discount = Discount on Bonds / Semiannual Period to Maturity
Semiannual Amortization of Discount = $12,000 / 20
Semiannual Amortization of Discount = $600

Answer to Question 3:

Present Value of Payments = $100,000
Interest Rate = 8%
Number of Payments = 3

Present Value of Payments = Annual Payment * PVIFA(8%, 3)
$100,000 = Annual Payment * (1 - (1/1.08)^3) / 0.08
$100,000 = Annual Payment * 2.5771
Annual Payment = $38,803

ekkarill92 answered 2 years ago
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