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Chapter 20 Solutions

# Chapter 20 Solutions - Chapter 20 Long-Term Debt 20.1 a If...

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1 Chapter 20: Long-Term Debt 20.1 a. If you purchase the bond on March 1, you owe the seller two months of interest. The seller owned the bond for two months since the last interest payment date (January 1). She is entitled to the interest earned during those two months. Since Raeo Corp. ’s interest payment will not go to her, you must pay it to her now. The interest rate on the bond is 10%. The interest per month is 0.8333% (=10% / 12). 1.6667% (= 0.8333% x 2) is the interest for two months. The bonds are selling at 100, 100% of face value. If today is March 1, you will pay 100% of the face plus 1.6667% for the bond. If the face value of the bonds is \$1,000, then you will pay \$1,000 + \$1,000 (0.016667) = \$1,016.67. b. If you purchase the bond on October 1, you owe the seller three months of interest. The seller owned the bond for three months since the last interest payment date (July 1). She is entitled to the interest earned during those three months. Since Raeo Corp. ’s interest payment will not go to her, you must pay it to her now. The interest rate on the bond is 10%. The interest per month is 0.8333% (= 10% / 12). 2.5% (0.8333% x 3) is the interest for three months. The bonds are selling at 100, 100% of face value. If today is October 1, you will pay 100% of the face value plus 2.5% for the bond. If the face value of the bonds is \$1,000, then you will pay \$1,000 + \$1,000 (0.025) = \$1,025. c. Since July 1 is an interest payment date, there is no accrued interest on the Raeo bonds. If today is July 1, you will pay 100% of the face value for the bond. If the face value of the bonds is \$1,000, then you will pay \$1,000. d. If you purchase the bond on August 15, you owe the seller six weeks of interest. The seller owned the bond for six weeks since the last interest payment date (July 1). She is entitled to the interest earned during those six weeks (a month and a half). Since Raeo Corp. ’s interest payment will not go to her, you must pay it to her now. The interest rate on the bond is 10%. The interest per two week period is 0.41667% (10% / 24). 1.25% (=0.41667% x 3) is the interest for one and a half months. The bonds are selling at 100, 100% of face value. If today is August 15, you will pay 100% of the face plus 1.25% for the bond. If the face value of the bonds is \$1,000, then you will pay \$1,000 + \$1,000 (0.0125) = \$1,012.50. 20.2 a. A protective covenant is the part of an indenture or loan agreement that limits the actions of the borrowing company. b.

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Chapter 20 Solutions - Chapter 20 Long-Term Debt 20.1 a If...

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