Question

Coney Island Entertainment issues $1,500,000 of 6% bonds, due in 10 years, with interest payable semiannually on June 30 and December 31 each year.

   

Calculate the issue price of a bond and complete the first three rows of an amortization schedule when:

Required:

1. The market interest rate is 6% and the bonds issue at face amount. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round interest rate factors.)

2. The market interest rate is 7% and the bonds issue at a discount. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round interest rate factors.)

3. The market interest rate is 5% and the bonds issue at a premium. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round interest rate factors.)

Answer 1

1.When bonds are issued at par
Table values are based on:
n=	20
i=	3.0%
Cash Flow	Amount	Present Value
Interest	$1,500,000*3% =$45,000	$45,000*PVAF(3%,20) =$45,000*14.87747 =$669,480
Principal	$1,500,000	$1,500,000*PVIF(3%,20) =$1,500,000*0.55368 =$830,520
Price of Bonds		$1,500,000
2.When bonds are issued at discount
Table values are based on:
n=	20
i=	3.0%
Cash Flow	Amount	Present Value
Interest	$1,500,000*3% =$45,000	$45,000*PVAF(3.5%,20) =$45,000*14.2339 =$640,525
Principal	$1,500,000	$1,000,000*PVIF(3.5%,20) =$1,500,000*0.505035 =$757,553
Price of Bonds		$1,398,078
Discount on bonds =$1,500,000 - $1,398,078 =$101,922
3.When bonds are issued at premium
Table values are based on:
n=	20
i=	3.0%
Cash Flow	Amount	Present Value
Interest	$1,500,000*3% =$45,000	$45,000*PVAF(2.5%,20) =$45,000*15.58916 =$701,512
Principal	$1,500,000	$1,000,000*PVIF(2.5%,20) =$1,500,000*0.61027 =$915,405
Price of Bonds		$1,616,917
Premium on bonds =$1,616,917 - $1,500,000 =$116,917
2
Amortization table
Date	Interest Payment	Interest expenses	Discount amorrtization	Bond carrying amount
Issue date				13,98,078
30-Jun-19	45,000	48,933	3,933	14,02,011
31-Dec-19	45,000	49,070	4,070	14,06,081
30-Jun-20	45,000	49,213	4,213	14,10,294
3
Amortization table
Date	Interest Payment	Interest expenses	Premium amorrtization	Bond carrying amount
Issue date				16,16,917
30-Jun-19	45,000	40,423	4,577	16,12,340
31-Dec-19	45,000	40,308	4,692	16,07,648
30-Jun-20	45,000	40,191	4,809	16,02,840