Question

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

(a)		$11 million, 11-year, 14% unsecured bonds, interest payable quarterly. Bonds were priced to yield 10%.
(b)		$27 million par of 11-year, zero-coupon bonds at a price to yield 10% per year.
(c)		$15 million, 11-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. (Round stated and effective rate per period to 2 decimal places, e.g. 10.25%. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

				Unsecured Bonds			Zero-Coupon Bonds			Mortgage Bonds
(1)		Maturity value		$			$			$
(2)		Number of interest periods
(3)		Stated rate per period			%			%			%
(4)		Effective rate per period			%			%			%
(5)		Payment amount per period		$			$			$
(6)		Present value		$			$			$

Answer 1

		Unsecured		Zero-Coupon		Mortgage
		Bonds		Bonds		Bonds
(1)	Maturity value	$11,000,000		27000000		15000000
(2)	Number of interest periods	44		0		11			14%/4 = 3.5% per quarter
(3)	Stated rate per period	3.50	%	0	%	9	%		10%/4 = 2.5% per quarter
(4)	Effective rate per period	2.50	%	10	%	10	%
(5)	Payment amount per period	$385,000		0		1350000
(6)	Present value	$13,915,382		$9,463,230		$14,025,668
	Calculation of effective interest rate for unsecured bonds									2.50%	10%
	Present Value of annuity factor for 2.5% for 44 periods =	26.50385							1	0.97561	0.90909
	Payment amount per period	$385,000							2	0.95181	0.82645
	Present value	$10,203,982							3	0.9286	0.75131
	Present value of interest factor for 44th period	0.3374							4	0.90595	0.68301
	PV of maturity value	$3,711,400							5	0.88385	0.62092
		(11,000,000*.3374)							6	0.8623	0.56447
									7	0.84127	0.51316
	Total present value	$13,915,382							8	0.82075	0.46651
									9	0.80073	0.4241
									10	0.7812	0.38554
	Zero coupon bonds								11	0.76214	0.35049
	Present value of interest factor @10% for 11th year	0.35049							12	0.74356	6.49505
	Maturity value	$27,000,000							13	0.72542
		$9,463,230							14	0.70773
									15	0.69047
	Mortgage Bonds								16	0.67362
	Present vlaue of annuity factor for 9% for 11 periods	6.49505							17	0.6572
	Preiodic payment	$1,350,000							18	0.64117
	Present value	$8,768,318							19	0.62553
									20	0.61027
	Present value of interest factor for 11th year	0.35049							21	0.59539
	Maturity value	$15,000,000							22	0.58086
		$5,257,350							23	0.5667
	Total present value	$14,025,668							24	0.55288
									25	0.53939
									26	0.52623
									27	0.5134
									28	0.50088
									29	0.48866
									30	0.47674
									31	0.46511
									32	0.45377
									33	0.4427
									34	0.43191
									35	0.42137
									36	0.41109
									37	0.40107
									38	0.39128
									39	0.38174
									40	0.37243
									41	0.36335
									42	0.35448
									43	0.34584
									44	0.3374
										26.50385