On January 1, 2021, Diggs 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, 2023) a. The note is issued at ___________(par / premium / discount) b. The present value of the note is $______________ c. The cash received at July 1, 2021 is $__________________ d. The interest income to Diggs Co. at December 31, 2022 is $_________________ e. The carrying amount of the note at July 1, 2023 is $__________________
On January 1, 2021, Diggs 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, 2023)
a. The note is issued at ___________(par / premium / discount)
b. The
c. The cash received at July 1, 2021 is $__________________
d. The interest income to Diggs Co. at December 31, 2022 is $_________________
e. The carrying amount of the note at July 1, 2023 is $__________________
a)
Coupon Rate =10%
Market rate=8%
The coupon rate is more than the Market rate i.e. It is issued at a Premium
b) The Present Value of the Bond is
Annual Interest Rate = 10%
Semiannual Interest Rate = 5%
Semiannual Interest = 5% * $100,000
Semiannual Interest = $5,000
Annual Market Rate = 8%
Semiannual Market Rate = 4%
Time to Maturity = 10 years
Semiannual Period = 20
PV of Note = $5,000 * PVIFA (4%, 20) + $100,000 * PVIF (4%, 20)
PV of Note = $5,000*13.590 + $100,000*0.4563
PV of note = 67,950 + 45,630
PV of note =$113,580
Present value of the Bond is $113,580 while its redemption is at $100,000. Hence Bond is issued at premium.
c)The cash received on July 1, 2021, is
100,000*10/100*6/12=$5000
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