Question

On January 1, 20x6, Cell Co. lends some money in exchange for a 10% $100,000 10-year note. The market rate for similar notes is 8%. Interest is received semiannually each July 1 and January 1. The financial year ends December 31. Round to the nearest whole number. (Hint: Prepare a partial amortization schedule to July 1, 20x8)

a.    The note is issued at -                                  (par / premium / discount)

b.    The present value of the note is - $

c.     The cash received at July 1, 20x6 is -$  

d.     The interest revenue to Cell Co. at December 31, 20x7 is -$

e.     The carrying amount of the note at July 1, 20x8 is -$

Answer 1

a) Ans:

Coupon Rate =10%

Market rate=8%

Coupon rate is more than Market rate i.e It is issued at Premium

b) The Present Value of the Bond is

Ans: Interest received per 6 months (PVAF 4% 20 Years) + Maturity Amount (PVF 4% 20 Years)

=(100,000*10/100*6/12)(13.590) + $100,000 *0.4563

=67,950 +45,630=$113,580

c.     The cash received at July 1, 20x6 is -$

Ans: 100,000*10/100*6/12=$5000

d.     The interest revenue to Cell Co. at December 31, 20x7 is -$

Ans: Interest revenue for 1 year=                                                           $10,000 (5000+5000)

Less: Amortisation cost ($113,580-$100,000)/10 years                     ($1358)

                                                    Net Revenue=                                              $8642

E)    The carrying amount of the note at July 1, 20x8 is -$

$5000*PVAF(4%,15 Years) + $100,000*PVF (4%,15y)

$5000* 11.118     +$100,000*.555

=$111, 090