Excel Problem Set 2 Bonds, spring 2008

# Excel Problem Set 2 Bonds, spring 2008 - Excel Problem Set...

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Excel Problem Set 2, Bonds, Background 8% March 31, 2016 Bond Issue (\$100,000,000) Quoted market Yield-to-maturity 7.850% Effective 6-month interst rate 3.925% Coupon 8.000% Semi-annual coupon 4.000% Principle \$100,000,000 Amount received (present value) \$101,026,077 Reduction to Net bond Interest premium/ Date Payments payable Expense discount 31-Mar-06 \$101,026,077 30-Sep-06 \$4,000,000 \$100,991,351 \$3,965,274 \$34,726 31-Mar-07 \$4,000,000 \$100,955,261 \$3,963,911 \$36,089 30-Sep-07 \$4,000,000 \$100,917,755 \$3,962,494 \$37,506 31-Mar-08 \$4,000,000 \$100,878,777 \$3,961,022 \$38,978 30-Sep-08 \$4,000,000 \$100,838,269 \$3,959,492 \$40,508 31-Mar-09 \$4,000,000 \$100,796,171 \$3,957,902 \$42,098 30-Sep-09 \$4,000,000 \$100,752,421 \$3,956,250 \$43,750 31-Mar-10 \$4,000,000 \$100,706,954 \$3,954,533 \$45,467 30-Sep-10 \$4,000,000 \$100,659,701 \$3,952,748 \$47,252 31-Mar-11 \$4,000,000 \$100,610,595 \$3,950,893 \$49,107 30-Sep-11 \$4,000,000 \$100,559,561 \$3,948,966 \$51,034 31-Mar-12 \$4,000,000 \$100,506,523 \$3,946,963 \$53,037 30-Sep-12 \$4,000,000 \$100,451,404 \$3,944,881 \$55,119 31-Mar-13 \$4,000,000 \$100,394,122 \$3,942,718 \$57,282 30-Sep-13 \$4,000,000 \$100,334,591 \$3,940,469 \$59,531 31-Mar-14 \$4,000,000 \$100,272,724 \$3,938,133 \$61,867 30-Sep-14 \$4,000,000 \$100,208,428 \$3,935,704 \$64,296 31-Mar-15 \$4,000,000 \$100,141,609 \$3,933,181 \$66,819 30-Sep-15 \$4,000,000 \$100,072,167 \$3,930,558 \$69,442 31-Mar-16 \$104,000,000 \$100,000,000 \$3,927,833 \$72,167 \$1,026,077 Journal Entries 31-Mar-06 Cash \$101,026,077 Bonds payable \$100,000,000 Bond premium \$1,026,077 30-Sep-06 Interest expense \$3,965,274 Bond premium \$34,726 Cash \$4,000,000 31-Mar-07 Interest expense \$3,963,911 Bond premium \$36,089 Cash \$4,000,000 Background: Corporate and government bonds pay interest semi-annually. They are quoted, for example, as an 8% March 31, 2016, which means the bonds pay a semi-annual interest payment of 4% (half of the 8% quoted coupon) each September 30 and March 31, and mature March 31, 2016. Bonds sell at the present value of their future payments, using a market-determined discount rate. In the issue shown below, \$100,000,000 of 8%, 10-year bonds are issued March 31, 2006, when the quoted market yield-to- maturity is 7.85%. The effective semi-annual discount rate equals 7.85% / 2, or 3.925%. Cell C38 shows the calculated NPV of the bond issue (what it would sell for on March 31, 2006, when the effective semi-annual interest rate is 3.925%. The face value is \$100,000,000 (principle, or amount to be repaid March 31, 2016) but the company will receive \$101,026,077 because it is paying an above-market interest rate of

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Excel Problem Set 2 Bonds, spring 2008 - Excel Problem Set...

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