Question

On January 1 of this year, Barnett Corporation sold bonds with a face value of $505,500 and a coupon rate of 5 percent. The bonds mature in 20 years and pay interest annually on December 31. Barnett uses the effective-interest amortization method. Ignore any tax effects. Each case is independent of the other cases. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answers to nearest whole dollar amount.) Required: 1. Complete the following table. The interest rates provided are the annual market rate of interest on the date the bonds were issued. Case A (5%) Case B (6%). Case C (4%) | a. Cash received at issuance b. Interest expense recorded in Year 1 C. Cash paid for interest in Year 1 d. Cash paid at maturity for bond principal

Answer 1

Correct Answer:

	Case A (5%)	Case B (6%)	Case C (4%)
Cash received at issuance	$           505,500.00	$                447,520.00	$           574,199.00
Interest expense recorded in year 1	$             25,275.00	$                  26,851.20	$             22,967.96
Cash paid for interest in year 1	$             25,275.00	$                  25,275.00	$             25,275.00
Cash paid at maturity for bond principal	$           505,500.00	$                505,500.00	$           505,500.00

Working:

Annually		Formula Applied
Face Value of Bond	$                          505,500
Interest Annually @ 5 % (5/100 * 505,500)	$                            25,275	(Face Value of Bonds * Coupon rate )
Semi-Annual Effective interest Rate ® ( 5%)	0.050	5%
Time Period (n) 20 years	20.00	20
Present Value of Face Value of Bond	$             190,517.63359	Face Value/(1+r%)^2n
Present Value of Interest payment	$                    314,982.37	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$                          505,500	PV of Face value of bond + PV of Interest Paid Annually
Premium or (Discount)	$                                      -	Issue Price - Face Value of Bonds

Annually		Formula Applied
Face Value of Bond	$                          505,500
Interest Annually @ 5 % (5/100 * 505,500)	$                            25,275	(Face Value of Bonds * Coupon rate )
Semi-Annual Effective interest Rate ® ( 6%)	0.060	6%
Time Period (n) 20 years	20.00	20
Present Value of Face Value of Bond	$             157,617.28944	Face Value/(1+r%)^2n
Present Value of Interest payment	$                    289,902.26	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$                          447,520	PV of Face value of bond + PV of Interest Paid Annually
Premium or (Discount)	$                          (57,980)	Issue Price - Face Value of Bonds

Annually		Formula Applied
Face Value of Bond	$                          505,500
Interest Annually @ 5 % (5/100 * 505,500)	$                            25,275	(Face Value of Bonds * Coupon rate )
Semi-Annual Effective interest Rate ® ( 4%)	0.040	4%
Time Period (n) 20 years	20.00	20
Present Value of Face Value of Bond	$             230,703.60130	Face Value/(1+r%)^2n
Present Value of Interest payment	$                    343,495.50	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$                          574,199	PV of Face value of bond + PV of Interest Paid Annually
Premium or (Discount)	$                            68,699	Issue Price - Face Value of Bonds

End of answer.

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