Question

Assume Kelly Corporation uses the effective interest rate method for amortizing bond premiums and discounts. Kelly...

Assume Kelly Corporation uses the effective interest rate method for amortizing bond premiums and discounts.

Kelly Corporation issued bonds on January 1, 2008. The bonds have a face value of $472000 and mature in 15 years. The stated interest rate is 8%. The market rate at date of issue was 6%. The bond pays interest annually on December 31.

How much interest will the bond pay on December 31, 2008?  

What was the issue price of the bond? (Please round to the nearest dollar

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Homework Answers

Answer #1

Answer : 1) Interest rate $37,760

              2) Issue price $563,699

Explanation:

Interest rate = Face value * Stated interest rate

                  = $472,000 * 8/100

Interest rate = $37,760

Interest on December 31,2008 is $37,760

The present value of 15 payments is

PVAF(15, 6%Market rate) * $37,760

9.7122 * $37,760 = $366,732.67

The present value of the principal maturity value is:

PVF(15,6% Market rate) *$472,000

0.4173 * $472,000 = $196,965.60

The issue price of bond is sum of the two present value

$366,732.67 +$196,965.60 = $563,699

Note : Decimal value are rounded to 4

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