Question

On January 1, 2019, Mulally Inc. purchased bonds with a face amount of $1 million and a coupon interest rate of 8%. The bonds mature in 10 years and pay interest annually on December 31 of each year. The market rate of interest on January 1, 2019 for bonds of this type was 6%. Mulally closes its books on December 31 and the bonds are considered Available for Sale. Ignore taxes.

1. At what price were the bonds issued? You should calculate this using either the Price or Net Present Value function in Excel.

2. Using the effective interest method, prepare in Excel an amortization schedule showing interest income, amortization, and bond carrying value for the life of the bond.

Answer 1

Solution 1:

Chart Values are based on:
n=	10	Half years
i=	6%	Semi annual
Cash Flow	Table Value	*	Amount	=	Present Value
Par (Maturity) Value	0.55839478	*	$10,00,000	=	$5,58,395
Interest (Annuity) [$1,000,000*8%]	7.36008705	*	$80,000	=	$5,88,807
Issue Price of Bonds					$11,47,202

Solution 2:

Bond Amortization Schedule
Date	Cash Received	Interest Revenue	Premium amortization	Carrying value of bond
01-Jan-19				$11,47,202
31-Dec-19	$80,000	$68,832	$11,168	$11,36,034
31-Dec-20	$80,000	$68,162	$11,838	$11,24,196
31-Dec-21	$80,000	$67,452	$12,548	$11,11,648
31-Dec-22	$80,000	$66,699	$13,301	$10,98,346
31-Dec-23	$80,000	$65,901	$14,099	$10,84,247
31-Dec-24	$80,000	$65,055	$14,945	$10,69,302
31-Dec-25	$80,000	$64,158	$15,842	$10,53,460
31-Dec-26	$80,000	$63,208	$16,792	$10,36,668
31-Dec-27	$80,000	$62,200	$17,800	$10,18,868
31-Dec-28	$80,000	$61,132	$18,868	$10,00,000