Homework Answers
Answer Part 1:
Face value =$100,000,000
Annual coupon = 100000000 * 6% =$6,000,000
Time to maturity = 30 years
Market rate of interest = 7%
Price of bonds = PV (rate, nper, pmt, fv, type)
= (7%, 30, -6000000, -100000000, 0)
= $87,590,958.81
Price of bonds = $87,590,958.82
Answer Part 2:
(a) Straight line method:
Discount = 100000000 - $87,590,958.82 = $12,409,041.18
Amortization of discount per year = 12409041.18 / 30 = $413,634.71
Cash payment = 100000000 * 6% = $6,000,000
Interest expense = 6000000 + 413634.71= $6,413,634.71
(b) Effective Interest method:
Interest expense = $87,590,958.82 * 7% = $6,131,367.12
Cash payment = 100000000 * 6% = $6,000,000
Amortization of discount year = $6,131,367.12 - $6,000,000= $131,367.12
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