On January 1, 20X1, Nicks Corporation issued $250 million of floating-rate debt. The debt carries a contractual interest rate of “LIBOR plus 5.5%,” which is reset annually on January 1 of each year. The LIBOR rates on January 1, 20X1, 20X2, and 20X3, were 6.5%, 7.0%, and 5.5%, respectively. Required: Prepare a journal entry to record the issuance of the bonds on January 1, 20X1, at par. What was the effective (or market) interest rate when the bonds were issued? Prepare a journal entry to record interest expense for 20X1, 20X2, and 20X3. Assume that interest is paid annually on December 31. What is the market value of the debt at December 31, 20X3, assuming Nicks Corporation’s credit risk has not changed.
On January 1, 20X1, Nicks Corporation issued $250 million of floating-rate debt. The debt carries a contractual interest rate of “LIBOR plus 5.5%,” which is reset annually on January 1 of each year. The LIBOR rates on January 1, 20X1, 20X2, and 20X3, were 6.5%, 7.0%, and 5.5%, respectively. Required: Prepare a journal entry to record the issuance of the bonds on January 1, 20X1, at par. What was the effective (or market) interest rate when the bonds were issued? Prepare a journal entry to record interest expense for 20X1, 20X2, and 20X3. Assume that interest is paid annually on December 31. What is the market value of the debt at December 31, 20X3, assuming Nicks Corporation’s credit risk has not changed.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
On January 1, 20X1, Nicks Corporation issued $250 million of floating-rate debt. The debt carries a contractual interest rate of “LIBOR plus 5.5%,” which is reset annually on January 1 of each year. The LIBOR rates on January 1, 20X1, 20X2, and 20X3, were 6.5%, 7.0%, and 5.5%, respectively.
Required:
- Prepare a
journal entry to record the issuance of the bonds on January 1, 20X1, at par. What was the effective (or market) interest rate when the bonds were issued? - Prepare a journal entry to record interest expense for 20X1, 20X2, and 20X3. Assume that interest is paid annually on December 31.
- What is the market value of the debt at December 31, 20X3, assuming Nicks Corporation’s credit risk has not changed.
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