Homework Answers
Face Value of Bonds = $73,600,000
Issue Value of Bonds = $77,655,044
Premium on Bonds = Issue Value of Bonds - Face Value of
Bonds
Premium on Bonds = $77,655,044 - $73,600,000
Premium on Bonds = $4,055,044
Annual Coupon Rate = 14%
Semiannual Coupon Rate = 7%
Semiannual Coupon = 7% * $73,600,000
Semiannual Coupon = $5,152,000
Time to Maturity = 10 years
Semiannual Period = 20
Semiannual Amortization of Premium = Premium on Bonds /
Semiannual Period
Semiannual Amortization of Premium = $4,055,044 / 20
Semiannual Amortization of Premium = $202,752
Semiannual Interest Expense = Semiannual Coupon - Semiannual
Amortization of Premium
Semiannual Interest Expense = $5,152,000 - $202,752
Semiannual Interest Expense = $4,949,248
Answer 1 and 2.
Answer 3.
Interest Expense for Year 1 = $4,949,248
Answer 4.
Yes. Proceed from issue of bonds will always be greater than the face amount when the contract rate is greater than the market rate of interest.
Answer 5.
Annual Interest Rate = 13%
Semiannual Interest Rate = 6.50%
Present Value of Face Amount = $73,600,000 * PV of $1 (6.50%,
20)
Present Value of Face Amount = $73,600,000 * 0.28380
Present Value of Face Amount = $20,887,680
Present Value of Semiannual Interest Payments = $5,152,000 * PVA
of $1 (6.50%, 20)
Present Value of Semiannual Interest Payments = $5,152,000 *
11.01851
Present Value of Semiannual Interest Payments = $56,767,364
Price Received for the Bonds = Present Value of Face Amount +
Present Value of Semiannual Interest Payments
Price Received for the Bonds = $20,887,680 + $56,767,364
Price Received for the Bonds = $77,655,044
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