Question

1.Calculate the fair value that an investor will pay for the bond described below—Round your answer to the nearest $1,000 and do not use $, commas or pennies.

–Face amount of bond: 2,000,000

–Stated interest rate: 3.5%

–Term remaining: 20 years

–Interest payments semi annual

–Market interest rate: 2.8%

2.Will the journal entry to record the purchase of this bond include “Discount on Bond Investment” or “Premium on Bond Investment”?

Answer 1

PAYOUT OF THE BOND = FACE VALUE * INTEREST RATE

PAYOUT = 2000000*3.5%

PAYOUT = 70000

PRESENT VALUE OF INTEREST = P{1-(1+R)^-n/r)

WHERE P =70000, N=20 YEARS, R = 2.8%

PV = 70000(1-(1+0.028)^-20/0.028

PV = 70000(1-(1/1.028^20)/0.028}

PV = 70000(1-0.5756224277)/0.028

PV = 70000(0.42437757)/0.028

PV = 70000(15.15634186)

PV = 10,60,943.93

PV = 1060944

PRESENT VALUE OF THE BOND AMOUNT = VALUE OF BOND/(1+r)^N

PV = 2000000/(1+0.028)^20

PV = 2000000/1.73724989

PV =11,51,244.85

TOTAL PRESENT VALUE OF INTEREST AND PRINCIPAL =1060943.93+1151244.85

= 2212188.78

= 2212189

2212000

2 THE JOURNAL ENTRY WILL BE DONE PREMIUM TO THE BOND