Homework Answers
| Face value of the bond | 270000 | |
| Coupon rate | 10% | |
| Year to maturity | 10 | |
| Payment frequency | Semi-annual | |
| Interest Payament | 270,000 * 10% * 1/2 | 13,500 |
1. Market rate is 6%
| Issue price of the bond = | [PV of interest payament ] + [ PV of bond repayment] |
| Issue price of the bond = | [Pv of annuity facotr at 3% (i.e. 6% *1/ 2 because of semi-annual payment) where n= 20 (10 year *2 payement frequency in a year)] + [PV for 20 th n at 3%] |
| Issue price of the bond = | [ 13500 * PVOA at 3% for 20 ] + [ 270000 * PV at 3% for 20th] |
| Issue price of the bond = | [ 13500 * 14.8775 ] + [ 270000 * 0.5537] |
| Issue price of the bond = | 350,345 |
| Journal | ||
| Cash/ Bank A/c | 350,345 | |
| TO Bond repayable A/c | 270000 | |
| To premium on bond payable A/c (270,000-350345) | 80,345 | |
| (bond issued above the face value i.e. premium) |
Working
| Year | Interest | PV @ 3% | PV |
| 1 | 13500 | 0.9709 | 13107 |
| 2 | 13500 | 0.9426 | 12725 |
| 3 | 13500 | 0.9151 | 12354 |
| 4 | 13500 | 0.8885 | 11995 |
| 5 | 13500 | 0.8626 | 11645 |
| 6 | 13500 | 0.8375 | 11306 |
| 7 | 13500 | 0.8131 | 10977 |
| 8 | 13500 | 0.7894 | 10657 |
| 9 | 13500 | 0.7664 | 10347 |
| 10 | 13500 | 0.7441 | 10045 |
| 11 | 13500 | 0.7224 | 9753 |
| 12 | 13500 | 0.7014 | 9469 |
| 13 | 13500 | 0.6810 | 9193 |
| 14 | 13500 | 0.6611 | 8925 |
| 15 | 13500 | 0.6419 | 8665 |
| 16 | 13500 | 0.6232 | 8413 |
| 17 | 13500 | 0.6050 | 8168 |
| 18 | 13500 | 0.5874 | 7930 |
| 19 | 13500 | 0.5703 | 7699 |
| 20 | 13500 | 0.5537 | 7475 |
| 20 | 270000 | 0.5537 | 149492 |
| (any diff. is due to found off) | 350338 |
2. Market rate is 10%
| Issue price of the bond = | [PV of interest payament ] + [ PV of bond repayment] |
| Issue price of the bond = | [Pv of annuity facotr at 5% (i.e. 10% *1/ 2 because of semi-annual payment) where n= 20 (10 year *2 payement frequency in a year)] + [PV for 20 th n at 5%] |
| Issue price of the bond = | [ 13500 * PVOA at 5% for 20 ] + [ 270000 * PV at 5% for 20th] |
| Issue price of the bond = | [ 13500 * 12.462 ] + [ 270000 * 0.3769] |
| Issue price of the bond = | 270,000 |
| Journal | ||
| Cash/ Bank A/c | 270,000 | |
| TO Bond repayable A/c | 270000 | |
| (bond issued at par i.e. at face value) |
| Year | Interest | PV @ 5% | PV |
| 1 | 13500 | 0.9524 | 12857 |
| 2 | 13500 | 0.9070 | 12245 |
| 3 | 13500 | 0.8638 | 11662 |
| 4 | 13500 | 0.8227 | 11106 |
| 5 | 13500 | 0.7835 | 10578 |
| 6 | 13500 | 0.7462 | 10074 |
| 7 | 13500 | 0.7107 | 9594 |
| 8 | 13500 | 0.6768 | 9137 |
| 9 | 13500 | 0.6446 | 8702 |
| 10 | 13500 | 0.6139 | 8288 |
| 11 | 13500 | 0.5847 | 7893 |
| 12 | 13500 | 0.5568 | 7517 |
| 13 | 13500 | 0.5303 | 7159 |
| 14 | 13500 | 0.5051 | 6818 |
| 15 | 13500 | 0.4810 | 6494 |
| 16 | 13500 | 0.4581 | 6185 |
| 17 | 13500 | 0.4363 | 5890 |
| 18 | 13500 | 0.4155 | 5610 |
| 19 | 13500 | 0.3957 | 5342 |
| 20 | 13500 | 0.3769 | 5088 |
| 20 | 270000 | 0.3769 | 101760 |
| 270000 |
3. Market rate is 14%
| Issue price of the bond = | [PV of interest payament ] + [ PV of bond repayment] |
| Issue price of the bond = | [Pv of annuity facotr at 7% (i.e. 14% *1/ 2 because of semi-annual payment) where n= 20 (10 year *2 payement frequency in a year)] + [PV for 20 th n at 7%] |
| Issue price of the bond = | [ 13500 * PVOA at 7% for 20 ] + [ 270000 * PV at 7% for 20th] |
| Issue price of the bond = | [ 13500 * 10.5940 ] + [ 270000 * 0.2584] |
| Issue price of the bond = | 212,787 |
| Journal | ||
| Cash/ Bank A/c | 212,787 | |
| Discount on bond issue A/c (270,000 - 212,787) | 57,213 | |
| TO Bond repayable A/c | 270000 | |
| (bond issued at discout i.e. at lower than face value) |
| Year | Interest | PV @ 7% | PV |
| 1 | 13500 | 0.9346 | 12617 |
| 2 | 13500 | 0.8734 | 11791 |
| 3 | 13500 | 0.8163 | 11020 |
| 4 | 13500 | 0.7629 | 10299 |
| 5 | 13500 | 0.7130 | 9625 |
| 6 | 13500 | 0.6663 | 8996 |
| 7 | 13500 | 0.6227 | 8407 |
| 8 | 13500 | 0.5820 | 7857 |
| 9 | 13500 | 0.5439 | 7343 |
| 10 | 13500 | 0.5083 | 6863 |
| 11 | 13500 | 0.4751 | 6414 |
| 12 | 13500 | 0.4440 | 5994 |
| 13 | 13500 | 0.4150 | 5602 |
| 14 | 13500 | 0.3878 | 5236 |
| 15 | 13500 | 0.3624 | 4893 |
| 16 | 13500 | 0.3387 | 4573 |
| 17 | 13500 | 0.3166 | 4274 |
| 18 | 13500 | 0.2959 | 3994 |
| 19 | 13500 | 0.2765 | 3733 |
| 20 | 13500 | 0.2584 | 3489 |
| 20 | 270000 | 0.2584 | 69773 |
| any diff. is due to round off | 212792 |
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