Question

On 12/31/16, Troy Inc. issued 12-year, 5.5% bonds with a face value of $8,000,000. The bonds were issued for a price to yield a market rate of 6.25%. The bonds are callable on any coupon date, at a redemption price equal to 105 plus accrued interest. During 2019, market interest rates declined to 4.05% and Troy called the bonds on 12/31/19. What was the gain (or loss) recognized by Troy for its early payoff of the bonds on 12/31/19?

Answer 1

Computation of Issue price of the Bond n Table values are based on 12 years i 6.25% per annum Cash Flow Amount Interest $ 5,280,000 (8000000*5.50%*12) Principal $ 8,000,000 PV Factors 0.48312 $ 0.48312 $ Present Value 2,550,874 (5280000*0.48312) 3,864,960 (8000000*0.48312) 193,248 (400000*0.48312) 6,609,082 Redp. Premium $ 0.48312 $ 400,000 (8000000*5%) Price of Bond $ The issue price of the bond is $6,609,082 Date 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 Totals Ammortization Schedule Carrying Cash Received Interest Income Discount Amortized Amount of Note $ 6,609,082 $ 413,068 $ 413,068 $ 7,022,150 $ 438,884 $ 438,884 $ 7,461,034 $ 466,315 $ 466,315$ 7,927,349 $ 1,318,267 $ 1,318,267 $ $ $ $ $ 9,720,000 The redemption price for the note was [(8000000*105%)+(8000000*5.50%*3)] Less- The carrying amount of note as on 12/31/19 Loss recognized by Troy for early pay off $ $ -7,927,349 1,792,651