Question

power tap is planning to issue bonds with a face value of $1,600,000 and a coupon rate 9 percent. The bonds mature in 9 years and pay interest semiannually every June 30 and December 31. All of bonds were sold on Juanuary 1 of this year. PowerTap uses the effective interest amortization method.Assume an annual market rate of interest of 10 perecent.

Required information The following information applies to the questions displayed below.) PowerTap Utilities is planning to issue bonds with a face value of $1,600,000 and a coupon rate of 9 percent. The bonds mature in 9 years and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. PowerTap uses the effective interest amortization method. Assume an annual market rate of interest of 10 percent. (FV of $1. PV of $1. FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.) Required: 1. What was the issue price on January 1 of this year? (Round your final answers to nearest whole dollar amount.) Issue price < Prey 23 of 5 Next >

Answer 1

1. Issue price of the bond = 1,506,482

	Table	Factor value	Value	Discounted value
Face value of the bond	PV of $1 [ 5%,18]	0.41552	1600000	664832
Interest on the bond	PVAF of $1 [ 5%,18]	11.68959	72000	841650
Issue price of the bond				1506482

2.

	June 30	December 31
Interest expense	75324	75490

Semiannual interest date	Interest Payment	Interest expense [Carrying value*5%]	Discount amortization [Expense - Payment]	Bond carrying balance [Previous year + Discount]
			0	1506482
June 30, Year 1	72000	75324	3324	1509807
December 31, Year 1	72000	75490	3490	1513297
June 30, Year 2	72000	75665	3665	1516962
December 31, Year 2	72000	75848	3848	1520810