Question

P9-7A Coney Island Entertainment issues $1,300,000 of 7% bonds, due in 15 years, with interest payable semiannually on June 30 and December 31 each year. Required: Calculate the issue price of a bond and complete the first three rows of an amortization schedule when 1. The market interest rate is 7% and the bonds issue at face amount. 2. The market interest rate is 8% and the bonds issue at a discount 3. The market interest rate is 6% and the bonds issue at a premium.

Answer 1

Face Value Stated/Coupon Rate Coupon payment frequency Market Rate Maturity Period 1. Market Rate 7% 2. Market Rate 8% 3. Market Rate 9% $13,00,000 $13,00,000 $13,00,000 7.00% 7.00% 7.00% Semi Annually Semi Annually Semi Annually 7.00% 8.00% 6.00% 15 15 Coupon payment frequency Coupon Rate consider for calculation Interest Payment Semi Annually 3.50% [7%/2] $45,500 ($1300000 x 3.5%] 3.50% [7%/4] 30 (15 x 2] Semi Annually Semi Annually 3.50% 3.50% [7%/2] [7%/2] $45,500 $45,500 ($1300000 x 3.5%] ($1300000 x 3.5%] 4.00% 3.00% [8%/4] [6%/2] 30 30 (15 x 2] (15 x 2] Market Rate Consider for Calculation Period to maturity | Present Value of Coupon Payments Present Value of Annuity of $1 for period 30 Present Value of Coupon Payments (A) 18.39205 $8,36,837 ($45500 x 18.39205) 17.29203 $7,86,787 [$45500 x 17.29203] 19.60044 $8,91,820 [$45500 x 19.60044] Present Value of Redeemed value Present Value of $1 for period 30 Present Value of Maturity Value (B) 0.35628 $4,63,163 ($1300000 x 0.35628] $13,00,000 0.30832 $4,00,816 ($1300000 x 0.30832] $11,87,560 0.41199 $5,35,587 ($1300000 x 0.41199) $14,27,407 Issue price [(A) +(B)] Note : Present Value factor is rounded to 5 decimal

Amortisation Schedule 1. Market Rate 7% Date Beginning Book Value Amortisation (B)-(C) (A) June 30, 1st Dec 31, 2nd June 30. 3rd $13,00,000 $13,00,000 $13,00,000 Cash Payment (B) $45,500 $45,500 $45,500 Interest Expense (C) = (A) x 7%/2 $45,500 $45,500 $45,500 Ending Book Value (A) + (C)-(B) $13,00,000 $13,00,000 $13,00,000 SO 2. Market Rate Date 8% Beginning Book Value Cash Payment | (A) (B) June 30, 1st Dec 31, 2nd June 30. 3rd $11,87,560 $11,89,562 $11,91,644 $45,500 $45,500 $45,500 Interest Expense Amortisation of Discount Ending Book Value (C) = (A) x 8%/2 (C)-(B) (A) + (C)-(B) $47,502 $2,002 $11,89,562 $47,582 $2,082 $11,91,644 $47,666 $2,166 $11,93,810 3. Market Rate Date 6% Beginning Book Value Cash Payment (A) (B) June 30, 1st Dec 31, 2nd June 30. 3rd $14,27,407 $14,24,729 $14,21,971 $45,500 $45,500 $45,500 Interest Expense Amortisation of Premium Ending Book Value (C)=(A) x 6%/2 (B)-(C) (A)+(C)-(B) $42,822 $2,678 $14,24,729 $42,742 $2,758 $14,21,971 $42,659 $2,841 $14,19,130