Question

Your company issues bonds with a face value of $1,000 with an annual coupon rate of 8%. Interest payments are made semi-annually on June 30 and December 31. The duration of the bond is 10 years. The market rate on similar bonds is 12 percent. What is the value of the bond? Make the journal entry to issue the bond. Calculate interest expense and make the first interest payment entry. Calculate the interest expense of the 12th interest payment.

Answer 1

1)	The value of a bond is the sum total of the PV of the expected cash
	flows from the bond, if it is held till maturity, the discount
	rate being the market interest rate:
	The expected cash flows from the bond are:
	*the maturity value of $1000, receivable at EOY 10, and
	*the semi-annual interest payments of $40 for 20 half years,
	which constitutes an annuity.
	Value of the bond = 1000/1.06^20+40*(1.06^20-1)/(0.06*1.06^20) =					$           771
	JOURNAL ENTRY FOR ISSUE OF THE BOND:
	Cash			771
	Discount on bonds payable			229
	Bonds payable				1000
	Note:
	Entry is made for the value of only one bond as the nmber of bonds
	is not given.
2)	First interest expense = 771*6% = $46
	JOURNAL ENTRY FOR 1ST PAYMENT OF INTEREST:
	Interest expense			46
	Discount on bonds payable				6
	Cash (1000*4%)				40
3)	The amortization table for 12 half years would be as below:
	Half Year	Beginning CV	Interest expense at 6%	Cash interest paid	Discount amortization	Ending CV
	1	771	46	40	6	777
	2	777	47	40	7	784
	3	784	47	40	7	791
	4	791	47	40	7	798
	5	798	48	40	8	806
	6	806	48	40	8	815
	7	815	49	40	9	824
	8	824	49	40	9	833
	9	833	50	40	10	843
	10	843	51	40	11	854
	11	854	51	40	11	865
	12	865	52	40	12	877
	13	877	53	40	13	889
	14	889	53	40	13	903
	15	903	54	40	14	917
	16	917	55	40	15	932
	17	932	56	40	16	948
	18	948	57	40	17	964
	19	964	58	40	18	982
	20	982	58	40	18	1000
	Interest expense of the 12th payment = $52