ACCT 3002- E3A Final -Fall 2017 Question (2): Bonds-Pricing 15 points On January

Question

ACCT 3002- E3A Final -Fall 2017 Question (2): Bonds-Pricing 15 points On January 1, 2017 XYZ Co. issued 4-year bonds with a face value of $1,000,000 and a stated (coupon) interest rate of 6%, payable annually on December 31. The bonds were sold at a discount, The following are selected segments of present value tables. Present value of an ordinarv annuity of $1 Periods 5% 6% 7% 0.952 0.943 0.935 2 1.859 1.833 1808 Periods 5%6%7% 0.952 0.943 0.935 20.907 0.890 0.873 3 0.864 0.840 0.816 4 0.823 0.792 0.763 2.723 2.673 2.624 3.546 3.465 3.387 Required: (A) Calculate the issue price of the bonds (B) Record the entry for issuance of bonds (C) Record the entry for the first interest payment on Dec. 31 2017.

Explanation / Answer

Since bonds are issued at discount, YTM rate should be higher than the coupon rate, in the given PV rates 7% is higher than coupon rate of 6% and used for bond price and interest calculations.

A. Bond price:

B&C:

entries:

Amortisation schedule:

Particulars Cash flow Discount factor Discounted cash flow Interest payments-Annuity (7%,4 periods) 60,000.0 3.3870 2,03,220.00 Principle payments -Present value (7%,4 periods) 10,00,000 0.7630 7,63,000.00 A Bond price 9,66,220.00 Face value 10,00,000 Premium/(Discount) -33,780.00 Interest amount: Face value 10,00,000 Coupon/stated Rate of interest 6.00% Frequency of payment(in months) 12 B Interest amount 1000000*0.06*12/12= 60000 Present value calculation: yield to maturity/Effective rate 7.0000% Effective interest per period(i) 0.07*12/12= 7.000% Number of periods: Ref Particulars Amount a Number of interest payments in a year                                     1 b Years to maturiy                                     4 c=a*b Number of periods                                     4

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