Question

Hillinger, Inc. issues $100,000 of 4% bonds on January 1, Year 1. The bonds have a five-year term and pay interest semiannually on June 30 and December 31 each year. Assuming a market interest rate of 5%, what is the carrying value of the bonds as of December 31, Year 1? A.$96,015 B.$96,415 C.$97,000

Answer 1

	Cash interest	Interest expense	Discount amortized	Carrying value
January 1, Year 1				95624
June 30, Year 1	2000	2391	391	96015
December 31, Year 1	2000	2400	400	96415
Option B $96,415 is correct
Workings:
Semi-annual interest	2000	=100000*4%*6/12
Number of periods	10	=5*2
	Amount	PV factor 2.5%	Present value
Semi-annual interest	2000	8.75206	17504
Principal	100000	0.78120	78120
Total			95624
	PV factor 2.5%
Semi-annual interest	8.75206	=(1-(1.025)^-10)/0.025
Principal	0.78120	=1/1.025^10
	Interest expense
June 30, Year 1	2391	=95624*5%/2
December 31, Year 1	2400	=96015*5%/2