Question

Coney Island Entertainment issues $1,400,000 of 6% bonds, due in 20 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.)

Required information

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)	Market interest rate=6%			Bond issue at face amount
	face value		$1,400,000
	Interest payment
	($1400000*6%*6/12)		$42,000
	Market interest rate
	(6%/2 semi-annual period)		3%
	Period to maturity
	20years*2 period each year		40
	1	2	3	4	5
		Amortization Schedule
	Date	Cash paid	Interest expense	Increase in carrying value	Carrying Value
		Face Value*Stated rate	Carrying Value	(3)-(2)	Prior Carrying Value+4
			*Market Rate
	beginning				$1,400,000
	30-Jun	$                         42,000.00	42000	0	$1,400,000
	31-Dec	$                         42,000.00	42000	0	$1,400,000
2)	Market interest rate=7%			Bond issue at discount	find present value of interest payment and principal
				interest	42000	3.5% 40 period	PVIFA=	21.35	896700
				pincipal	1400000	3.5% 40 period	PVIF=	0.2525	353500
									1250200
	face value		$1,400,000
	Interest payment
	($1400000*6%*6/12)		$42,000
	Market interest rate
	(7%/2 semi-annual period)		3.5%
	Period to maturity
	20years*2 period each year		40
	1	2	3	4	5
		Amortization Schedule
	Date	Cash paid	Interest expense	Increase in carrying value	Carrying Value
		Face Value*Stated rate	Carrying Value	(3)-(2)	Prior Carrying Value+4
			*Market Rate
	beginning				1250200
	30-Jun	$                         42,000.00	43757	1757	$1,251,957
	31-Dec	$                         42,000.00	$43,818.50	1818	$1,253,775
3)	Market interest rate=5%			Bond issue at premium	find present value of interest payment and principal
				interest	42000	2.5% 40 period	PVIFA=	25.1	1054200
				pincipal	1400000	2.5% 40 period	PVIF=	0.37243	521402
									1575602
	face value		$1,400,000
	Interest payment
	($1400000*6%*6/12)		$42,000
	Market interest rate
	(5%/2 semi-annual period)		2.5%
	Period to maturity
	20years*2 period each year		40
	1	2	3	4	5
		Amortization Schedule
	Date	Cash paid	Interest expense	Increase in carrying value	Carrying Value
		Face Value*Stated rate	Carrying Value	(3)-(2)	Prior Carrying Value+4
			*Market Rate
	beginning				1575602
	30-Jun	$                         42,000.00	39390.05	-2610	$1,572,992
	31-Dec	$                         42,000.00	$39,324.80	-2675	$1,570,317