Question

Cybernetics Inc. issued $50 million of 6% coupon three-year bonds with coupons paid at the end...

Cybernetics Inc. issued $50 million of 6% coupon three-year bonds with coupons paid at the end of each year. The effective rate at the beginning of Years 1, 2 and 3 was 8%, 5% and 2% respectively. Assume Cybernetics decides to account for the bonds using the amortized cost method. What is the book value of the bonds at the end of Year 2?

A.

$47.45 million
B.

$49.07 million
C.

$50.78 million
D.

$50.01 million
E.

$52.34 million
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Answer #1

Option B, $49.07 million

Workings:

The amortized cost method assumes that the effective interest rate remains 8% through out the life of the bond.

Issue price:

NPER 3.00
FV 50000000
PMT 3000000.0
Rate 8.00%
PV $47,422,903.01 [-pv(rate,nper,pmt,fv,0)

Discount table:

Year Interest payment Interest expense Discount amortized Book value
0 47422903.01
1 3000000 3793832.241 793832.241 48216735.25
2 3000000 3857338.82 857338.8203 49074074.07
3 3000000 3925925.926 925925.9259 50000000
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