Question

Innovative Component Inc. needed financing to build a new manufacturing plant. On January 1, 2014, Innovative Component issued $400,000 of 8% bonds that pay interests semiannually and mature in 10 years. The bonds were sold for $428,400to yield a 7% annual rate.

1. Fill out the basic information needed for pricing the bonds Innovative Component issued in January 20014.

       Principal amount: __________________   

       Semiannual coupon rate: __________________

Semiannual market rate: ___________________

       Discount periods: _____________________

b. Fill out the amortization table. Round every number to the nearest dollar amount.

	Interest Expense	Interest Paid	Premium Amortization	Bond Payable, Net
0	___	___	___
1

1. After the issuance of bonds in 2014, the market price of the bonds increased in year 2016. How does the increase in market price affect Innovative Component’s interest expense reported on its income statement for the year of 2016?

Increase     Decrease      No change            (Circle one)

Answer 1

Fill out the basic information needed for pricing the bonds Innovative Component issued in January 2014.
Principal amount:	$ 400,000.00
Semiannual coupon rate:	4%
Semiannual market rate:	3.5%
Discount periods:	20
b. Fill out the amortization table. Round every number to the nearest dollar amount.
	A	B	B-A	C
	Interest Expense = 3.5% x Prev. yr Bonds payable	Interest Paid = 400000 x 4%	Premium Amortization	Bond Payable, Net
0				$        428,400.00
1	$   14,994.00	$           16,000.00	$            1,006.00	$        427,394.00
2	$   14,958.79	$           16,000.00	$            1,041.21	$        426,352.79
3	$   14,922.35	$           16,000.00	$            1,077.65	$        425,275.14
4	$   14,884.63	$           16,000.00	$            1,115.37	$        424,159.77
5	$   14,845.59	$           16,000.00	$            1,154.41	$        423,005.36
6	$   14,805.19	$           16,000.00	$            1,194.81	$        421,810.55
7	$   14,763.37	$           16,000.00	$            1,236.63	$        420,573.92
8	$   14,720.09	$           16,000.00	$            1,279.91	$        419,294.00
9	$   14,675.29	$           16,000.00	$            1,324.71	$        417,969.29
10	$   14,628.93	$           16,000.00	$            1,371.07	$        416,598.22
11	$   14,580.94	$           16,000.00	$            1,419.06	$        415,179.16
12	$   14,531.27	$           16,000.00	$            1,468.73	$        413,710.43
13	$   14,479.86	$           16,000.00	$            1,520.14	$        412,190.29
14	$   14,426.66	$           16,000.00	$            1,573.34	$        410,616.95
15	$   14,371.59	$           16,000.00	$            1,628.41	$        408,988.55
16	$   14,314.60	$           16,000.00	$            1,685.40	$        407,303.14
17	$   14,255.61	$           16,000.00	$            1,744.39	$        405,558.75
18	$   14,194.56	$           16,000.00	$            1,805.44	$        403,753.31
19	$   14,131.37	$           16,000.00	$            1,868.63	$        401,884.68
20	$   14,115.32	$           16,000.00	$            1,884.68	$        400,000.00
Total	$ 291,600.00	$         320,000.00	$          28,400.00
After the issuance of bonds in 2014, the market price of the bonds increased in year 2016. How does the increase in market price affect Innovative Component’s interest expense reported on its income statement for the year of 2016?
Increase     Decrease      No change	Decreases
If interest rates decline, the price of a bond goes up, and if interest rates rise, the price of a bond declines. The prices of bonds and interest rates move in opposite directions