Question

In: Accounting

On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of $3,000,000 and...

On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of $3,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:

Present value of 1 for 8 periods at 6% .627

Present value of 1 for 8 periods at 8% .540

Present value of 1 for 16 periods at 3% .623

Present value of 1 for 16 periods at 4% .534

Present value of annuity for 8 periods at 6% 6.210

Present value of annuity for 8 periods at 8% 5.747

Present value of annuity for 16 periods at 3% 12.561

Present value of annuity for 16 periods at 4% 11.652

26. The present value of the principal is

a. $2,136,000.

b. $1,602,000.

c. $2,492,000.

d. $1,508,000.

27. The present value of the interest is

a. $1,048,680.

b. $1,398,240.

c. $1,390,400.

d. $1,307,320.

28. The issue price of the bonds is

a. $3,534,240.

b. $2,650,680.

c. $3,558,240.

d. $2,998,400.

Solutions

Expert Solution

Face value            3,000,000
YTM 8%
Payment frequency semiannual
Bond years 8
So effective semiannual periods 16
Semiannual Interest 4.00%
PV of 1 for 16 period at 4% 0.534
Solution 26
So PV of principal 3000000*0.534
          1,602,000
So option B is correct
Solution 27
Interest rate 6%
Interest payment semiannual 3000000*6%*1/2
                90,000
PV of annuity for 16 period @ 4% 11.652
PV of Interest payments 90000*11.652
          1,048,680
So option A is correct
Solution 28
Issue price of Bond= PV of Principal + PV of Interest
Issue price of Bond= 1,602,000 + 1,048,680
Issue price of Bond=           2,650,680
So option B is correct

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