The initial proceeds per bond, the size of the issue, the initial maturity of th

Question

The initial proceeds per bond, the size of the issue, the initial maturity of the bond, and the years remaining to maturity are shown in the following table for a number of bonds. In each case, the firm is in the 40 percent tax bracket, and the bond has a $1,000 par value.

Bond

Proceeds per bond

Size of issue

Initial maturity of bond

Years remaining to maturity

A

$985

10,000 bonds

20 years

15 years

B

1,025

20,000

25

16

C

1,000

22,500

12

9

D

960

5,000

25

15

E

1,035

10,000

30

16

A.)    Indicate whether each bond was sold at a discount, at a premium, or at its par value.

B.)    Determine the total discount or premium for each issue.

C.)   Determine the annual amount of discount or premium amortized for each bond.

D.)   Calculate the unamortized discount or premium for each bond.

E.)    Determine the after-tax cash flow from the unamortized discount associated with the retirement now of each of these bonds, using the values developed in part d.

Bond

Proceeds per bond

Size of issue

Initial maturity of bond

Years remaining to maturity

A

$985

10,000 bonds

20 years

15 years

B

1,025

20,000

25

16

C

1,000

22,500

12

9

D

960

5,000

25

15

E

1,035

10,000

30

16

Explanation / Answer

a. Premium/discount per bond = Proceeds per bond – Par value per bond

Bond

Proceeds per bond

par value per bond

A

$985

$15

B

$1,025

$1000

$25

C

$1,000

$1000

D

$960

$1000

$40

E

$1,035

$1000

$35

-

b.Total Premium/discount = Premium/discount per bond x Size of issue (# of bonds)

c.Annual premium/discount amortized per bond = Prem/disc per bond ÷ Initial maturity (in years)

d.Unamortized premium/discount per bond = Annual prem/disc per bond x Number years remaining

e.After-tax cash flow = [– (Unamortized pre/disc per bond x Size of issue x Corporate tax rate)]

Bond

Proceeds per bond

par value per bond

Premium per bond discount per bond

A

$985

$1000 -

$15

B

$1,025

$1000

$25

-

C

$1,000

$1000

0 0

D

$960

$1000

-

$40

E

$1,035

$1000

$35

-

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