Question

Christmas Anytime issues $710,000 of 5% bonds, due in 10 years, with interest payable semiannually on June 30 and December 31 each year.

Calculate the issue price of a bond and complete the first three rows of an amortization schedule when:

1. The market interest rate is 5% and the bonds issue at face amount. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round interest rate factors.)

	Issue price

Date	Cash Paid	Interest Expense	Increase in Carrying Value	Carrying Value
01/01/18
06/30/18
12/31/18

2.The market interest rate is 6% and the bonds issue at a discount. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round interest rate factors.)

	Issue price

Date	Cash Paid	Interest Expense	Increase in Carrying Value	Carrying Value
01/01/18
06/30/18
12/31/18

3. The market interest rate is 4% and the bonds issue at a premium. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round interest rate factors.)

	Issue price

Date	Cash Paid	Interest Expense	Decrease in Carrying Value	Carrying Value
01/01/18
06/30/18
12/31/18

Answer 1

• All working forms part of the answer
• Given interest rate to be divided by 2 (or 6months/12months) as interest is payable semi-annually.
• Requirement 1

Since, market interest rate and interest rate of bond, both are 5%. Issue price will be equal to face Value ie $ 710,000

Proof:

	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$               7,10,000.00	at	2.5%	Interest rate for	20	term payments
PV of $1	0.610270943
PV of	$               7,10,000.00	=	$               7,10,000.00	x	0.610270943	=	$      4,33,292.37	A
Interest payable per term	at	2.5%	on	$         7,10,000.00
Interest payable per term	$                   17,750.00
PVAF of 1$	for	2.5%	Interest rate for	20	term payments
PVAF of 1$	15.58916229
PV of Interest payments	=	$               17,750.00	x	15.58916229	=		$      2,76,707.63	B
				Bond Value (A+B)			$      7,10,000.00

Period	Cash payment	Interest expense	Increase in Carrying Value	Carrying Value of Bond
01-Jan-18			$                              -	$                   7,10,000.00
30-Jun-18	$                  17,750.00	$            17,750.00	$                              -	$                   7,10,000.00
31-Dec-18	$                  17,750.00	$            17,750.00	$                              -	$                   7,10,000.00

• Requirement 2

Working:

	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$               7,10,000.00	at	3.0%	Interest rate for	20	term payments
PV of $1	0.553675754
PV of	$               7,10,000.00	=	$               7,10,000.00	x	0.553675754	=	$      3,93,109.79	A
Interest payable per term	at	2.5%	on	$         7,10,000.00
Interest payable per term	$                   17,750.00
PVAF of 1$	for	3.0%	Interest rate for	20	term payments
PVAF of 1$	14.87747486
PV of Interest payments	=	$               17,750.00	x	14.87747486	=		$      2,64,075.18	B
				Bond Value (A+B)			$      6,57,184.96

Based on above working:

Issue Price = $ 657,184.96 or $ 657,185

Period	Cash payment	Interest expense	Increase in Carrying Value	Carrying Value of Bond
01-Jan-18			$                              -	$                   6,57,184.96
30-Jun-18	$                  17,750.00	$            19,715.55	$               (1,965.55)	$                   6,59,150.51
31-Dec-18	$                  17,750.00	$            19,774.52	$               (2,024.52)	$                   6,61,175.03

• Requirement 3

Working:

	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$               7,10,000.00	at	2.0%	Interest rate for	20	term payments
PV of $1	0.672971333
PV of	$               7,10,000.00	=	$               7,10,000.00	x	0.672971333	=	$      4,77,809.65	A
Interest payable per term	at	2.5%	on	$         7,10,000.00
Interest payable per term	$                   17,750.00
PVAF of 1$	for	2.0%	Interest rate for	20	term payments
PVAF of 1$	16.35143334
PV of Interest payments	=	$               17,750.00	x	16.35143334	=		$      2,90,237.94	B
				Bond Value (A+B)			$      7,68,047.59

Issue Price: $ 768,047.59 or $ 768,048

Period	Cash payment	Interest expense	Decrease in Carrying Value	Carrying Value of Bond
01-Jan-18			$                              -	$                   7,68,047.59
30-Jun-18	$                  17,750.00	$            23,041.43	$                 5,291.43	$                   7,62,756.16
31-Dec-18	$                 17,750.00	$            22,882.68	$                 5,132.68	$                   7,57,623.48