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ABC Corporation issued $600,000 of 7% bonds due in 10 years. The bonds pay interest each...

ABC Corporation issued $600,000 of 7% bonds due in 10 years. The bonds pay interest each July 1 and January 1. Assume an effective interest rate of 8%. Determine the price of the bond and prepare an amortization schedule for two years. What is the interest expense for January 1, 2021

Solutions

Expert Solution

Step-1:Calculation of nominal annual interest rate
Effective interest = ((1+(i/n))^n)-1
          0.08 = ((1+(i/2))^2)-1
          1.08 = (1+(i/2))^2
          1.08 ^(1/2) = 1+(i/2)
     1.0392 = 1+(i/2)
     0.0392 = i/2
     0.0785 = i
So, nominal annual interest rate = 7.85%
Step-2:Calculation of price of bond
Price of bond =-pv(rate,nper,pmt,fv)
$ 5,65,267.55
Where,
rate = 7.85% / 2 = 0.039230485
nper = 10 * 2 = 20
pmt = $ 6,00,000.00 * 3.50% = $     21,000.00
fv = $ 6,00,000.00
Step-3:Bond amortization Schedule
Semi annual payment
Beginning Bonds Payable (a) Interest Expense (b=a*7.85%*6/12) Coupon Payment (c) Discount amortization (d=b-c) Unamortized discount (e) Ending Bonds payable (f)
$     34,732.45 $ 5,65,267.55
1 $ 5,65,267.55 $    22,186.75 $ 21,000.00 $ 1,186.75 $     33,545.70 $ 5,66,454.30
2 $ 5,66,454.30 $    22,233.33 $ 21,000.00 $ 1,233.33 $     32,312.37 $ 5,67,687.63
3 $ 5,67,687.63 $    22,281.74 $ 21,000.00 $ 1,281.74 $     31,030.63 $ 5,68,969.37
4 $ 5,68,969.37 $    22,332.05 $ 21,000.00 $ 1,332.05 $     29,698.58 $ 5,70,301.42

jeff jeffy answered 1 year ago
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