Question

On January 1, 20x6, Cell Co. lends some money in exchange for a 10% $100,000 10-year note. The market rate for similar notes is 8%. Interest is received semiannually each July 1 and January 1. The financial year ends December 31. Round to the nearest whole number. (Hint: Prepare a partial amortization schedule to July 1, 20x8)

a. The note is issued at -----(par / premium / discount)

b. The present value of the note is

c The cash received at July 1, 20x6 is

d. The interest revenue to Cell Co. at December 31, 20x7 is

e. The carrying amount of the note at July 1, 20x8 is

Answer 1

ANSWER:

(a) Ans:

Coupon Rate =10%

Market rate=8%

Coupon rate is more than Market rate i.e It is issued at Premium

(b) The Present Value of the Bond is

Ans: Interest received per 6 months (PVAF 4% 20 Years) + Maturity Amount (PVF 4% 20 Years)

=(100,000*10/100*6/12)(13.590) + $100,000 *0.4563

=67,950 +45,630

=$113,580

(c).     The cash received at July 1, 20x6 is -$

Ans: 100,000*10/100*6/12

=$5000

(d).     The interest revenue to Cell Co. at December 31, 20x7 is -$

Ans: Interest revenue for 1 year=  $10,000 (5000+5000)

Less: Amortization cost =($113,580-$100,000)/10 years   

= ($1358)

        Net Revenue= $8642

(e)    The carrying amount of the note at July 1, 20x8 is -$

$5000*PVAF(4%,15 Years) + $100,000*PVF (4%,15y)

$5000* 11.118     +$100,000*.555

=$111, 090

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