Karen Austin Inc. has issued three types of debt on January 1, 2014, the start o

Question

Karen Austin Inc. has issued three types of debt on January 1, 2014, the start of the company’s fiscal year.

Prepare a schedule that identifies the following items for each bond: (1) maturity value, (2) number of interest periods over life of bond, (3) stated rate per each interest period, (4) effective-interest rate per each interest period, (5) payment amount per period, and (6) present value of bonds at date of issue. (Round stated and effective rate per period to 2 decimal places, e.g. 10.00% and present value of bonds to 0 decimal places, e.g. 38,548.)

Unsecured
Bonds

Zero-Coupon
Bonds

Mortgage
Bonds

(a) $11.11 million, 10-year, 15.00% unsecured bonds, interest payable quarterly. Bonds were priced to yield 12%. (b) $25.72 million par of 10-year, zero-coupon bonds at a price to yield 12% per year. (c) $17.98 million, 10-year, 11.00% mortgage bonds, interest payable annually to yield 12%.

Explanation / Answer

For Unsecured Bonds:

Maturity Value = $11,110,000.00

Number of periods = 10 * 4 = 40 (since interest is payable quarterly)

Stated Rate per period = 15%/4 = 3.75%

Effective Rate per period = 12%/4 = 3.00%

Payment Amount per period = 3.75% * 11,110,000 = $416,625

Present Value =PV(3%,40,416625,11110000) = $13,036,038.37

For Zero Coupon Bond

Maturity Value = $25,720,000.00

Since it is a zero coupon bond, there will be no interest paid.

Thus, no of interest periods = stated rate per period = effective rate per period = payment amount per period = 0

Present Value = 25,720,000/(1 + 12%)10 = $8,281,151.65

For Mortgage Bonds

Maturity Value = $17,980,000.00

Number of periods = 10

Stated Rate per period = 11%

Effective Rate per period = 12%

Payment Amount per period = 11% * 17,980,000 = $1,977,800

Present Value =PV(12%,10,1977800,17980000) = $16,964,089.90

Unsecured Bonds Zero-Coupon Bonds Mortgage Bonds 1 Maturity value $11,110,000.00 $25,720,000.00 $17,980,000.00 3 Stated rate per period 3.75% 0 11% 4 Effective rate per period 3.00% 0 12% 5 Payment amount per period $416,625.00 0 $1,977,800.00 6 Present Value $13,036,038.37 $8,281,151.65 $16,964,089.90

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