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Concept explainers
1.
Compute the issue price of bonds and complete the first three rows of an amortization schedule if the market interest rate is 7% and the bonds are issued at face amount.
1.
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Explanation of Solution
Bonds:
Bonds are long-term promissory notes that are issued by a company while borrowing money from investors to raise fund for financing the operations.
Amortization Schedule:
A schedule that gives the detail about each loan payment and shows the allocation of principal and interest over the life of the note, or bond is called amortization schedule.
Calculate the issue price of bonds:
Figure (1)
Working Note:
Determine the amount of Interest Payment (PMT).
Determine the amount of Market interest rate (I).
Determine the amount of periods to maturity (N).
Complete the first three rows of an amortization schedule for the issuance of bonds:
Amortization Schedule | ||||
Date (1) |
Cash paid (2) |
Interest expense (3) |
Increase in carrying value (4) |
Carrying value (5) |
January 01 | $1,300,000 | |||
June 30 | $45,500 | $45,500 | $0 | $1,300,000 |
December 31 | $45,500 | $45,500 | $0 | $1,300,000 |
Table (1)
2.
Compute the issue price of bonds and complete the first three rows of an amortization schedule if the market interest rate is 8% and the bonds are issued at a discount.
2.
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Explanation of Solution
Calculate the issue price of bonds:
Figure (2)
Working note:
Determine the amount of Market interest rate (I).
Complete the first three rows of an amortization schedule for the issuance of bonds:
Amortization Schedule | ||||
Date (1) |
Cash paid (2) |
Interest expense (3) |
Increase in carrying value (4) |
Carrying value (5) |
January 01 | $1,187,602 | |||
June 30 | $45,500 | $47,504 | $2,004 | $1,189,606 |
December 31 | $45,500 | $47,584 | $2,084 | $1,191,690 |
Table (2)
3.
Compute the issue price of bonds and complete the first three rows of an amortization schedule if the market interest rate is 6% and the bonds are issued at a premium.
3.
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Explanation of Solution
Calculate the issue price of bonds:
Figure (3)
Working note:
Determine the amount of Market interest rate (I).
Complete the first three rows of an amortization schedule for the issuance of bonds:
Amortization Schedule | ||||
Date (1) |
Cash paid (2) |
Interest expense (3) |
Decrease in carrying value (4) |
Carrying value (5) |
January 01 | $1,427,403 | |||
June 30 | $45,500 | $42,822 | $2,678 | $1,424,725 |
December 31 | $45,500 | $42,742 | $2,758 | $1,421,967 |
Table (3)
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