Question 21, Part 1 On July 1, 2017 Pearl Limited issued bonds with a face value

Question

Question 21, Part 1 On July 1, 2017 Pearl Limited issued bonds with a face value of $1,062,000 due in 20 years, paying interest at a face rate of 6% on January 1 and July 1 each year. The bonds were issued to yield 8%. The company's year-end was September 30. The company used the effective interest method of amortization. Click here to view the factor table.(For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Your answer has been saved and sent for grading. Calculate the premium or discount on the bonds. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 5,275.)

Explanation / Answer

Principal 1,062,000 interest 31860 Calculation of bond issue price Where i= 4.00% t= 40 years principal * PV of $1 at 4% for 20 yrs = 1,062,000 * 0.20829        =              221,204 interest * PV of ordinary annuity at 12%= 31860 * 19.79277 =              630,598 bond issue price              851,802 so present value of the face amount              221,204 present value of the semi-annual interest payments              630,598 price received for bonds              851,802 Discount on bonds bonds face value 1,062,000 bonds issue price              851,802 Discount on bonds        210,198 answer

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