This preview shows page 1. Sign up to view the full content.
Unformatted text preview: compute an amortization schedule for the entire term, it is possible to directly compute the net bond liability at any interest date under either the interest method or straight-line method. Assume that $100,000 of 8% bonds were issued to yield 10% on January 1, 2000, the bond date. The bonds pay interest each December 31 and are scheduled to mature in ten years. Answer the following questions without producing an amortization schedule. Show all supporting calculations. (a) What is the book value of the bonds on January 1, 2006 if the firm uses the straight-line method? (b) What is the book value of the bonds on January 1, 2006 if the firm uses the interest (effective interest) method. (a) Original issue price = $100,000(PV1,.10,10)(.38554) + $8,000(PVA,.10,10)(6.14457) = $87,711. Original discount = $12,289. At Jan. 1/06, 4 years of term are left so BV = $100,000 .4($12,289) = $95,084. (b) BV = 100,000(PV1,.10,4)(.68301) + $8,000(PVA,.10,4)(3.16987) = $93,660....
View Full Document
- Fall '09