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	30000006%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

ekkarill92 answered 9 months ago

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