Lighthouse Enterprises decided to issue $700,000 of 10-year bonds. The interest

Question

Lighthouse Enterprises decided to issue $700,000 of 10-year bonds. The interest rate on the bonds is stated at 10%, payable semiannually. At the time the bonds were sold, the market rate had increased to 12%.

Instructions:

1. Determine the maximum amount an investor should pay for these bonds. (Note: round to the nearest dollar)

2. assuming the amount in (1) is paid, compute the amount at which the bonds would be reported by the investor after being held for one year. Use two recognized methods of handling amortization of the difference in cost and maturity value of the bonds and give support to the method you prefer. (Note: round to the nearest dollar).

Explanation / Answer

1. Maximum amount to be paid for the bond = 35000*PVAF(6%, 20periods) + 700000*PVF(6%, 20periods) = (35000*11.470) + (700000*0.312) = $619,710.55

2. Amortization in one year = (700000 - 619,710.55)*1/10 = $8,028.9
Value at which the bond would be reported = 700000 - (80289.44 - 8,028.9) = $627,739.46

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