Question

 On February 1, 2021, Cromley Motor Products issued 8% bonds, dated February 1, with a face amount of $60 million. The bonds mature on January 31, 2025 (4 years). The market yield for bonds of similar risk and maturity was 10%. Interest is paid semiannually on July 31 and January 31. Barnwell Industries acquired $60,000 of the bonds as a long-term investment. The fiscal years of both firms end December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Answer 1

A) PRICE OF BONDS ISSUED ON FEB 1,2021 :

Cash interest paid = 8% x $60,000,000 x 6/12 = $2,400,000

Present value of interest: Table 4, 8 payments @ 5% = 6.46321 x $2,400,000 = $15,511,704

Present value of $60 million: Table 2, 8 periods @ 5% = 0.67684 x $60,000,000 = $40,610,400

Price of bonds: $56,122,104 ($15,511,704 + $40,610,400)

Barnwell purchased 60,000 ÷ 60,000,000 = 0.1% of the bonds.

Therefore, the price paid was 0.1% x $56,122,104 = $56,122.104

PART B)

  CROMLEY   

PAYMENT NO.	CASH PAYMENT	EFFECTIVE INTEREST	DISCOUNT AMORTISATION	OUTSTANDING BALANCE
				$56,122,104
1	$2,400,000	$2,806,105	$406105	$56,528,209
2	$2,400,000	$2,826,410	$426,410	$56,954,619
3	$2,400,000	$2,847,731	$447731	$57402350
4	$2,400,000	$2870117	$470117	$57872467
5	$2,400,000	$2893623	$493623	$58366090
6	$2,400,000	$2918304	$518304	$58884394
7	$2,400,000	$2944220	$544220	$59428614
8	$2,400,000	$2971431	$571	$60,000,000

BARNWELL

PAYMENT NO.	CASH PAYMENT	EFFECTIVE INTEREST	DISCOUNT AMORTISATION	OUTSTANDING BALANCE
				$56,122
1	$2,400	$2,806	$406	$56,528
2	$2,400	$2,826	$426	$56,954
3	$2,400	$2,847	$447	$57401
4	$2,400	$2870	$470	$57871
5	$2,400	$28934	$494	$58365
6	$2,400	$2918	$518	$58883
7	$2,400	$2944	$544	$59427
8	$2,400	$2971	$571	$60,000