Question

Problem #1: Bonds 6% FACTS: Number of bonds Par value of each bond Stated interest rate Issue date Due date Call % Called on 500 Effective interest rate 1,800 Interest Paid Per Year 4% Payment dates 1/1/20X2 12/31/20X6 Years to maturity 102% 1/1/X6 January 1st July 1st

Answer 1

1) Value of Bond on the date of Issue:- (Interest/2*PVAF(Effective Rate of interest/2,2*period of maturity)+Maturity Value*PVF(Effective Rate of Interest/2, 2*Period of Maturity)

=(72/2*8.5302+1800*.744)

=1646.46

(Where 72= Interest (1800*4%),

8.5302= PVAF for 3% for 10 times

1800= Assumed redemption at face value only

.744= PVF for 3% at 10th time)

2) At the interest payment date the cash will neither increased nor decrease it will remain constant over the period i.e. 36. While the amount of interest that would be record will subject to change because of amortization of discount over the interest period.

3) Interest Expense for the Second Period of Interest:-

Working Note:-

Date	Interest Payment at Stated Rate	Interest expense at Effective Rate of Interest on Previous Book Value	Amortization of Discount	Balance in Discount Account	Credit balance in Bond Payable	Book Value of the Bond
01-01-2012				76,770	9,00,000	8,23,230
30-06-2012	18,000	24,697	6,697	70,073	9,00,000	8,29,927
31-12-2012	18,000	24,898	6,898	63,175	9,00,000	8,36,825
30-06-2013	18,000	25,105	7,105	56,071	9,00,000	8,43,929
31-12-2013	18,000	25,318	7,318	48,753	9,00,000	8,51,247
30-06-2014	18,000	25,537	7,537	41,215	9,00,000	8,58,785
31-12-2014	18,000	25,764	7,764	33,452	9,00,000	8,66,548
30-06-2015	18,000	25,996	7,996	25,455	9,00,000	8,74,545
31-12-2015	18,000	26,236	8,236	17,219	9,00,000	8,82,781
30-06-2016	18,000	26,483	8,483	8,738	9,00,000	8,91,262
31-12-2016	18,000	26,738	8,738	0	9,00,000	9,00,000

Where Discount amount= (1800-1646.46)*500

Thus Interest expense for 2nd interest payment is 24,898.

4) Amortization of Discount at third interest payment is 7,105.

5) Price of Bond at call:-

(Interest/2*PVAF(Effective Rate of interest/2,2*period od callable Bond)+Callable Value*PVF(Effective Rate of Interest/2, 2*Period of Callable Bond) =(72/2)*8.5302+(1800*102%*0.744) =1673.07. 7) Unamortised Discount amount as on the date of call (Refer Working Note):- 8,738.