On January 1 of this year, Bamett Corporation sold bonds with a face value of $5
ID: 2524029 • Letter: O
Question
On January 1 of this year, Bamett Corporation sold bonds with a face value of $500,000 and a coupon rate of 7 percent. The bonds mature in 10 years and pay interest annually on December 31. Barnett uses the effective-interest amortization method. Ignore any tax effects. Each case is independent of the other cases. (FV of $1. PV of S1, FVA of S1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answers to whole dollars.) Required 1. Complete the following table. The interest rates provided are the annual market rate of interest on the date the bonds were issued. Case A (7%) Case B (8%) Case C (6%) a. Cash received at issuance b. Interest expense recorded in Year 1 c. Cash paid for interest in Year 1 d. Cash paid at maturity for bond principalExplanation / Answer
First we will calculate bond issue price at different interest rate
@ 7%
In this case bond coupon and YTM is same 7%, so bond will be issued at $$500000
@8%
Bond Price = C x [1-{1/(1+r)n}]/r + M/(1+r)n
M= Face value = $500,000
r=rate of interest =8% or 0.08
Coupon Amount= $500,000 x 7%= $35,000
n= no of periods=10 years
Bond price= $35,000 x [1-{1/(1+0.08)10}]/0.08+ $500,000/(1+0.08)10
= $35,000 x [1-{1/(1.08)10}]/0.08+ $500,000/(1.08)10
= $35,000 x [1-{1/ 2.158924997}]/0.08+ $500,000/ 2.158924997
= $35,000 x [1-{0.463193488}]/0.08+ $231,596.74
= $35,000 x [0.536806512/0.08+ $231,596.74
= $35,000 x 6.710081399+ $231,596.74
= $234,852.85+ $231,596.74
= $466,450
Bond issue price is less than face value hence bond is issued at discount
Discount on issue of bond= Face value – Issue price
=$500,000-$466,449.59
=$33,550.41
Amortization of discount on bond per annum= Discount on issue of bond/ No of years
=$33,550.41/10
=$3,355
Cash interest = Face value x Coupon rate= $500,000 x 7%=$35,000
Interest expense= Cash interest + Amortization of discount on bond per annum
=$35,000+3,355
= $38,355
@6%
Bond price= $35,000 x [1-{1/(1+0.06)10}]/0.06+ $500,000/(1+0.06)10
= $35,000 x [1-{1/(1.06)10}]/0.06+ $500,000/(1.06)10
= $35,000 x [1-{1/ 1.790847697}]/0.06+ $500,000/ 1.790847697
= $35,000 x [1-{0.558394777}]/0.06+ $279,197.39
= $35,000 x [0.441605223/0.06+ $279,197.39
= $35,000 x 7.360087051+ $279,197.39
= $ 257,603.05 + $279,197.39
= $ 536,800
Bond issue price is more than face value hence bond is issued at premium
Premium on issue of bond= Issue price- Face value
=$536,800.44 -$500,000
=$36,800.44
Amortization of premium on bond per annum= premium on issue of bond/ No of years
=36,800.44 /10
=$3,680
Cash interest = Face value x Coupon rate= $500,000 x 7%=$35,000
Interest expense= Cash interest -Amortization of premium on bond per annum
=$35,000-$3,680
= $ 31,320
Case A(7%)
Case A(8%)
Case A(6%)
a
Cash received at issuance
$ 500,000
$ 466,450
$ 536,800
b
Interest expenses recorded in year1
$ 35,000
$ 38,355
$ 31,320
c
Cash paid for interest in year 1
$ 35,000
$ 35,000
$ 35,000
d
Cash paid at maturity for Bond principal
$ 500,000
$ 500,000
$ 500,000
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Case A(7%)
Case A(8%)
Case A(6%)
a
Cash received at issuance
$ 500,000
$ 466,450
$ 536,800
b
Interest expenses recorded in year1
$ 35,000
$ 38,355
$ 31,320
c
Cash paid for interest in year 1
$ 35,000
$ 35,000
$ 35,000
d
Cash paid at maturity for Bond principal
$ 500,000
$ 500,000
$ 500,000
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