Question

ABC Co. issues a 10 Year, 8% Bonds, the face value is 100,000 and market rate is 10%, it is compounded semi-annually.

1. Will the bond be issued at a premium or discount? Why?

2. Calculate the Bond Price upon issue.

3. Prepare the Amortization Table using the Effective method

Answer 1

1. The 8% bonds issued when the market interest rate is 10% will be issued at a discount. The lower interest rate makes the bonds less attractive in the market due to which investors will pay lesser to acquire them.

2. Bond Price: $87539

Cash Flow	Table Value	Present Value
$100,000 par (maturity) value (PV r=5%, n=20)	0.3769	37690
$4,000 interest payment (PVA r=5%, n=20)	12.4622	49849
Issue Price of Bond $		87539

3.

A	B	C	D = C - B	E	F	G = F - E
Date	Interest Payment (Stated Rate 8% x 6/12)	Interest Expense (Effective Rate 10% x 6/12)	Amortization	Debit Balance in Bond Discount	Credit Balance in Bonds Payable	Book value of Bonds
Issue				12461	100000	87539
Semi-annual payment 1	4000.00	4376.95	376.95	12084.05	100000.00	87915.95
2	4000.00	4395.80	395.80	11688.25	100000.00	88311.75
3	4000.00	4415.59	415.59	11272.67	100000.00	88727.33
4	4000.00	4436.37	436.37	10836.30	100000.00	89163.70
5	4000.00	4458.19	458.19	10378.11	100000.00	89621.89
6	4000.00	4481.09	481.09	9897.02	100000.00	90102.98
7	4000.00	4505.15	505.15	9391.87	100000.00	90608.13
8	4000.00	4530.41	530.41	8861.46	100000.00	91138.54
9	4000.00	4556.93	556.93	8304.54	100000.00	91695.46
10	4000.00	4584.77	584.77	7719.76	100000.00	92280.24
11	4000.00	4614.01	614.01	7105.75	100000.00	92894.25
12	4000.00	4644.71	644.71	6461.04	100000.00	93538.96
13	4000.00	4676.95	676.95	5784.09	100000.00	94215.91
14	4000.00	4710.80	710.80	5073.30	100000.00	94926.70
15	4000.00	4746.34	746.34	4326.96	100000.00	95673.04
16	4000.00	4783.65	783.65	3543.31	100000.00	96456.69
17	4000.00	4822.83	822.83	2720.47	100000.00	97279.53
18	4000.00	4863.98	863.98	1856.50	100000.00	98143.50
19	4000.00	4907.18	907.18	949.32	100000.00	99050.68
20	4000.00	4949.32	949.32	0.00	100000.00	100000.00