1. Park Corporation issued a ten-year $10,000,000 bond with an 8 percent face in
ID: 2455695 • Letter: 1
Question
1. Park Corporation issued a ten-year $10,000,000 bond with an 8 percent face interest rate that is paid semi-annually. If the market interest rate is 6 percent, how much money will Park receive?
$8,888,000
$9,689,000
$10,999,000
$11,488,000
2. Refer to Question 1. What is the interest expense for the first period?
$104,874
$184,650
$290,464
$344,640
3. Refer to Questions 1 and 2. What is the carrying value of the note at the end of the first period?
$8,654,324
$9,748,668
$10,824,516
$11,432,640
Explanation / Answer
1)
Bond Value = pv(rate, nper,pmt,fv)
Nper (indicates the semi annual period) = 10*2 = 20
PV (indicates the price) = ?
PMT (indicate the semi annual payment) = 10000000*8%*1/2 = 400000
FV (indicates the face value) = 10000000
Rate (indicates Half year YTM) = 6%*1/2 = 3%
Bond Value = pv( 3%,20,400000,10000000)
Bond Value = $ 11487747.49
Answer
$11,488,000
2) Using Effective Interest rate method
Interest expense for the first period = Bonds carrying Value Market Interest rate*1/2
Interest expense for the first period = 11488000*6%*1/2
Interest expense for the first period = 344,640
Answer
344,640
3)
Interest Payment = 10000000*8%*1/2 = 400000
Bonds Premium Amortisation = 400000-344640
Bonds Premium Amortisation = $ 55360
Carrying value of the note at the end of the first period = 11488000-55360
carrying value of the note at the end of the first period = $ 11,432,640
Answer
$11,432,640
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