Question

In October of fiscal year 2005, Lowe’s also issued $500 million of unsecured notes with a coupon rate of 5.5% and maturing in October 2035. How much did Lowe’s receive in cash from this issuance? Assume the market rate of interest is 5.61%. In April 2006, what will be the amount of Lowe’s cash payment to the investors who hold these notes? What will be Lowe’s interest expense from October 2005 to April 2006 for these notes? In April 2006, what will be the carrying value of these notes?

Answer 1

Amount of loan

$500

million

Coupon rate=5.5%

0.055

Semi annual coupon payment

$                         13.75

million

(500*0.055)/2

Number of semiannual period

60

(2035-2005)*2

Terminal payment at the end of 2035

$500

million

Lowes Receipt=Present Value of future cash flows discounted at market rate

Market rate of interest=5.61%=

0.0561

Semi annual rate=(0.0561/2)=

0.02805

Present Value of future cash flows

$492.060506

million

(Using PV function of excel with Rate=0.02805, Nper=60,Pmt=-13.75, FV=-500

Lowe will receive in cash

$492,060,506

Amount of cash payment in April 2006

$              13,750,000

JOURNAL ENTRY

Account Title

Debit

Credit

At the time of Bond issueissue:

Oct. 2005

Cash

$492,060,506

Discounts on Bonds payable

$7,939,494

Bonds Payable

$500,000,000

April, 2006

Interest expense

$              13,882,325

Discount on Bonds payable

$132,325

(7939494/60)

Cash

$                  13,750,000

Interest expense for the semi annual period October 2005 to April 2006

$              13,882,325

Carrying Value of these notes:

Carrying Value in Oct 2005

$492,060,506

(500000000-7939494)

Carrying Value in April 2006

$492,192,831

(500000000-(7939494-132325))