Question
In: Accounting
Use the following information to answer questions 7. On January 1, 2020, Beck Co....
Use the following information to answer questions 7.
On January 1, 2020, Beck Co. issued (sold) ten-year bonds with a face amount of $3,000,000 and a stated
interest rate of 10%. Interest is payable semi-annually on January1 and July 1st of each year.
The bonds were priced to yield 8% (market interest rate).
Present value factors are as follows:
At 4% At 8% At 10%
Present value of $1 for 10 periods 0.6756 0.4630 0.3860
Present value of $1 for 20 periods 0.4564 0.2145 0.1486
Present value of an ordinary annuity of $1 for 10 periods 8.1109 6.7100 6.1450
Present value of an ordinary annuity of $1 for 20 periods 13.590 9.8181 8.5136
7- The total issue price of the bonds was
a. $3,000,000.
b. $3,402,,000.
c. $2,760,000.
d. $3,407,700.
e. None of the above
Solutions
Expert Solution
Correct answer------------(d) $3,407,700
Working
| Bonds issue price is calculated by ADDING the: |
| Discounted face value of bonds payable at market rate of interest, and |
| Discounted Interest payments amount (during the lifetime) at market rate of interest. |
.
| Annual Rate | Applicable rate | Face Value | $ 3,000,000 | ||
| Market Rate | 8.00% | 4.00% | Term (in years) | 10 | |
| Coupon Rate | 10.00% | 5.00% | Total no. of interest payments | 20 |
..
| Calculation of Issue price of Bond | ||||||||
| Bond Face Value | Market Interest rate (applicable for period/term) | |||||||
| PV of | $ 3,000,000 | at | 4.00% | Interest rate for | 20 | term payments | ||
| PV of $1 | 0.45639 | |||||||
| PV of | $ 3,000,000 | = | $ 3,000,000 | x | 0.45640 | = | $ 1,369,200 | A |
| Interest payable per term | at | 5.00% | on | $ 3,000,000 | ||||
| Interest payable per term | $ 150,000 | |||||||
| PVAF of 1$ | for | 4.00% | Interest rate for | 20 | term payments | |||
| PVAF of 1$ | 13.59033 | |||||||
| PV of Interest payments | = | $ 150,000 | x | 13.59000 | = | $ 2,038,500 | B | |
| Bond Value (A+B) | $ 3,407,700 |
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