a company issued 1000, 4 years annual bond having face value of 10000 each with a...

a company issued 1000, 4 years annual bond having face value of 10000 each with a coupon rate of 14% if the market rate is 12% calculate amortization to be charged in year 3, ? and bond value as reported in balance sheet of company at the end of year 2

Expert Solution

Answer:

Number of bonds issued = 1,000
Face value per bond = $10,000

Face value of bonds = Number of bonds issued * Face value per bond
Face value of bonds = 1,000 * $10,000
Face value of bonds = $10,000,000

Annual Coupon Rate = 14%
Annual Coupon = 14% * $10,000,000
Annual Coupon = $1,400,000

Time to Maturity = 4 years
Annual Interest Rate = 12%

Issue Value of Bonds = $1,400,000 * PVIFA(12%, 4) + $10,000,000 * PVIF(12%, 4)
Issue Value of Bonds = $1,400,000 * (1 - (1/1.12)^4) / 0.12 + $10,000,000 / 1.12^4
Issue Value of Bonds = $10,607,470

Amortization to be charged in Year 3 is $159,439.

Bond value to be reported in Balance at the end of year 2 is the Carrying value which is $10,338,010.

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