Question

Ivanhoe Inc. has issued three types of debt on January 1, 2020, the start of the company’s fiscal year.

(a)		$12 million, 10-year, 15% unsecured bonds, interest payable quarterly. Bonds were priced to yield 10%.
(b)		$30 million par of 10-year, zero-coupon bonds at a price to yield 10% per year.
(c)		$20 million, 10-year, 9% mortgage bonds, interest payable annually to yield 10%.

Prepare a schedule that identifies the following items for each bond: (1) maturity value, (2) number of interest periods over life of bond, (3) stated rate per each interest period, (4) effective-interest rate per each interest period, (5) payment amount per period, and (6) present value of bonds at date of issue

*Notate if each bond is unsecured, zero coupon, or mortgage bonds

Answer 1

Answer Unsecured Bonds $12,000,000 Zero-Coupon Bonds $30,000,000 Mortgage Bonds $20,000,000 1 Maturity Value 40 10 2 Number of Interest periods (term x number of payments per year) 3 Stated rate per period 3.75% (15% / 12 x 3) 9% (9% / 12 x 12) 4 Effective rate per period 2.50% (10% / 12 x 3) 10% (10% / 12 x 12) $450,000 $1,800,000 5 Payment amount per period (a) $12,000,000 x 3.75% = $450,000 (b) $30,000,000 x 0% = $0 (c) $20,000,000 x 9% = $1,800,000 6 Present value $15,765,411 $11,566,200 $18,771,026

Explanations Calculation of Present value Unsecured Bonds Present Value = Interest x PVAF (2.5%, 40) + Principal x PVIF 2.5%, 40) = $450,000 x 25.10278 + $12,000,000 x 0.37243 = $861,375 + $337,400 = $15,765,411 Zero-Coupon Bonds Present Value = Interest x PVAF (0%,0) + Principal x PVIF (10%, 10) = $0 x 0 + $30,000,000 x 0.38554 = $11,566,200 Mortgage Bonds Present Value = Interest x PVAF (10%, 10) + Principal x PVIF (10%, 10) = $1,800,000 x 6.14457 +$20,000,000 x 0.38554 = $18,771,026