Astro World issues bonds on January 1, 2012 that pay interest semi-annually on J
ID: 2714023 • Letter: A
Question
Astro World issues bonds on January 1, 2012 that pay interest semi-annually on June 30 and December 31. Portions of the bond amortization schedule appear below:
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying Value
(5)
Carrying
Value
1/1/2012
$17,864,493
6/30/2012
600,000
625,257
25,257
17,889,750
12/31/2012
600,000
626,141
26,141
17,915,891
19,810,031
6/30/2031
600,000
693,351
93,351
19,903,382
12/31/2031
600,000
696,618
96,618
$20,000,000
Required:
1. Were the bonds issued at face amount, a discount, or a premium?
2. What is the original issue price of the bonds?
3. What is the face amount of the bonds?
4. What is the term to maturity in years?
5. What is the stated annual interest rate?
6. What is the market annual interest rate?
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying Value
(5)
Carrying
Value
1/1/2012
$17,864,493
6/30/2012
600,000
625,257
25,257
17,889,750
12/31/2012
600,000
626,141
26,141
17,915,891
19,810,031
6/30/2031
600,000
693,351
93,351
19,903,382
12/31/2031
600,000
696,618
96,618
$20,000,000
Explanation / Answer
(1) A bond is issued at Discount if Coupon Rate is lower than market interest rate, which is seen in this case.
Therefore, these are discount bonds.
(2) Original issue price is the bond carrying value as on 1/1/2012, that is, $17,864,493.
(3) Face value of the bonds is equal to the redemption value as on 12/31/2031, that is, $20,000,000.
(4) Bond was issued in January 2012 and redeemed in December 2031.
So, maturity = 2031 - 2012 = 20 years (Both years inclusive).
(5) Stated annual interest rate = (Cash paid every 6 months / Face value) x 2
= ($600,000 / $20,000,000) x 2 = 6%
(6) Market annual interest rate = (Interest expense every 6 months / Face value) x 2
= ($625,257** / $20,000,000) x 2 = 6.25%
** Interest expense for 6/30/2012
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