Question

On June 30, 2021, Singleton Computers issued 4% stated rate bonds with a face amount of $200 million. The bonds mature on June 30, 2036 (15 years). The market rate of interest for similar bond issues was 3% (1.5% semiannual rate). Interest is paid semiannually (2.0%) on June 30 and December 31, beginning on December 31, 2021. (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.)

Required:
1. Determine the price of the bonds on June 30, 2021.
2. Calculate the interest expense Singleton reports in 2021 for these bonds using the effective interest method.

Answer 1

Req.1
Table values are based on:
n=	30	Interest Payment will be made 30 times
i=	2.0%
Cash Flow	Amount	Present Value
Interest	$200 million*2% =$4 million	$4 million*PVAF(1.5%,30) =$4 million*24.01584 =$96.06336 million
Principal	$200 million	$200 million*PVIF(6%,20) =$200 million*0.63796 =$127.592 million
Price of Bonds		$223.65536 million
Premium on Bonds =$223.65536 million - $200 million =$23.65536 million
Req.2
Interest expenses for 2021(For December 31,2021) =$223.65536 million*1.5% =$3.3548304 million
Note:There might be some rounding off errors