In: Accounting
Christmas Anytime issues $800,000 of 7% bonds, due in 15 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:
1. The market interest rate is 7% and the bonds issue at face amount
2. The market interest rate is 8% and the bonds issue at a discount.
3.. The market interest rate is 6% and the bonds issue at a premium
Correct Answer:
1: Issue price of the bond @ 7% Market rate of interest = $ 800,00
Working:
Annual Rate |
Applicable rate |
Face Value |
$ 800,000 |
|||||
Market Rate |
7.00% |
3.50% |
Term (in years) |
15 |
||||
Coupon Rate |
7.00% |
3.50% |
Total no. of interest payments |
30 |
||||
Calculation of Issue price of Bond |
||||||||
Bond Face Value |
Market Interest rate (applicable for period/term) |
|||||||
PV of |
$ 800,000 |
at |
3.50% |
Interest rate for |
30 |
term payments |
||
PV of $1 |
0.35628 |
|||||||
PV of |
$ 800,000 |
= |
$ 800,000 |
x |
0.35628 |
= |
$ 285,022.73 |
A |
Interest payable per term |
at |
3.5% |
on |
$ 800,000 |
||||
Interest payable per term |
$ 28,000 |
|||||||
PVAF of 1$ |
for |
3.5% |
Interest rate for |
30 |
term payments |
|||
PVAF of 1$ |
$ 18.39205 |
|||||||
PV of Interest payments |
= |
$ 28,000.00 |
x |
18.39205 |
= |
$ 514,977.27 |
B |
|
a |
Bond Value (A+B) |
$ 800,000 |
2: Issue price of the bond @ 8% Market rate of interest = $ 730,832
Working:
Annual Rate |
Applicable rate |
Face Value |
$ 800,000 |
|||||
Market Rate |
8.00% |
4.00% |
Term (in years) |
15 |
||||
Coupon Rate |
7.00% |
3.50% |
Total no. of interest payments |
30 |
||||
Calculation of Issue price of Bond |
||||||||
Bond Face Value |
Market Interest rate (applicable for period/term) |
|||||||
PV of |
$ 800,000 |
at |
4.00% |
Interest rate for |
30 |
term payments |
||
PV of $1 |
0.30832 |
|||||||
PV of |
$ 800,000 |
= |
$ 800,000 |
x |
0.30832 |
= |
$ 246,654.93 |
A |
Interest payable per term |
at |
3.5% |
on |
$ 800,000 |
||||
Interest payable per term |
$ 28,000 |
|||||||
PVAF of 1$ |
for |
4.0% |
Interest rate for |
30 |
term payments |
|||
PVAF of 1$ |
$ 17.29203 |
|||||||
PV of Interest payments |
= |
$ 28,000.00 |
x |
17.29203 |
= |
$ 484,176.93 |
B |
|
a |
Bond Value (A+B) |
$ 730,832 |
3: Issue price of the bond @ 6% Market rate of interest = $ 878,402
Working:
Annual Rate |
Applicable rate |
Face Value |
$ 800,000 |
|||||
Market Rate |
6.00% |
3.00% |
Term (in years) |
15 |
||||
Coupon Rate |
7.00% |
3.50% |
Total no. of interest payments |
30 |
||||
Calculation of Issue price of Bond |
||||||||
Bond Face Value |
Market Interest rate (applicable for period/term) |
|||||||
PV of |
$ 800,000 |
at |
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