Question
In: Finance
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 | ||
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