Question

On July 2, 2018, Corso Inc. purchased $ 440,000 of Bere Corp. 4% bonds at a price to yield a market interest rate of 5%. The bonds pay interest semi-annually on July 1 and January 1, and mature on July 1, 2028. Corso plans to hold this investment until it matures. At December 31, 2018, which is the year end for both companies, the bonds were trading at 94 (this means 94% of maturity value).

Calculate the acquisition cost for the bonds. [Show your calculations]

Answer 1

acquisition cost of bonds = $404,394.

price of bonds = [interest payment * present value of annuity factor] + [face value * present value factor]

here,

interest payment = $440,000*4%*6/12 =>$8,800.

present value of annuity factor = [1-(1+r)^(-n)]/r

here,

r = market rate =>5% per year =>2.5% per semi annual period =>0.025.

n = 21 six month periods between july 2,2018 to december 31 ,2018.

=>[1-(1.025)^(-21)] / 0.025

=>16.184548.

face value =$440,000.

present value factor = 1/(1+r)^n

=>1/(1.025)^21

=>0.59538629.

now,

acquisition cost = [8800*16.184548]+[440,000*0.59538629]

=>142,424.022+261.969.968

=>404,394.

acquisition cost of bonds =404,394.