Question

On July 1, 2017 Sweet Limited issued bonds with a face value of $1,002,000 due in 20 years, paying interest at a face rate of 6% on January 1 and July 1 each year. The bonds were issued to yield 8%. The company’s year-end was September 30. The company used the effective interest method of amortization.

Calculate the premium or discount on the bonds.

Answer 1

Purchase price of the Bonds
Year (20*2) = 40 Years	Cash flows (6%/2)	Present value @ 4% (8%/2)	Present value
1	30,060	0.9615385	28,904
2	30,060	0.9245562	27,792
3	30,060	0.8889964	26,723
4	30,060	0.8548042	25,695
5	30,060	0.8219271	24,707
6	30,060	0.7903145	23,757
7	30,060	0.7599178	22,843
8	30,060	0.7306902	21,965
9	30,060	0.7025867	21,120
10	30,060	0.6755642	20,307
11	30,060	0.6495809	19,526
12	30,060	0.6245970	18,775
13	30,060	0.6005741	18,053
14	30,060	0.5774751	17,359
15	30,060	0.5552645	16,691
16	30,060	0.5339082	16,049
17	30,060	0.5133732	15,432
18	30,060	0.4936281	14,838
19	30,060	0.4746424	14,268
20	30,060	0.4563869	13,719
21	30,060	0.4388336	13,191
22	30,060	0.4219554	12,684
23	30,060	0.4057263	12,196
24	30,060	0.3901215	11,727
25	30,060	0.3751168	11,276
26	30,060	0.3606892	10,842
27	30,060	0.3468166	10,425
28	30,060	0.3334775	10,024
29	30,060	0.3206514	9,639
30	30,060	0.3083187	9,268
31	30,060	0.2964603	8,912
32	30,060	0.2850579	8,569
33	30,060	0.2740942	8,239
34	30,060	0.2635521	7,922
35	30,060	0.2534155	7,618
36	30,060	0.2436687	7,325
37	30,060	0.2342968	7,043
38	30,060	0.2252854	6,772
39	30,060	0.2166206	6,512
40	30,060	0.2082890	6,261
40	1,002,000	0.2082890	208,706
Purchase price of the Bonds			803,676
Premium on Bonds = (1002,000-803,676) = 198,324