{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Fall 2010_Section Problem Set 9 (Chap 10)

# Fall 2010_Section Problem Set 9 (Chap 10) - AEM 2210...

This preview shows pages 1–3. Sign up to view the full content.

AEM 2210 Section Problem Set 9 Covering Material from Chapter 10 Name: Section: Material Review Pricing a Bond o Consists of two parts: principal and interest o Price equals PV of the principal + PV of the stream of interest payments (an annuity) o Use the current market interest rate to determine the PV of the principal and the stream of interest payments o The cash amount of the interest payments = face value of the bond x the stated interest rate o Ex: ABC Company issues a \$100,000 bond with a stated interest rate of 9% and a maturity of 5 years with interest payable annually. The market interest rate is 12%. Price the bond. Present value of \$100,000 in 5 years PV=100,000 = \$56,743 (1.12) 5 Present value of interest payments Total interest payments: 9% x \$100,000 = \$9,000 Present Value of an annuity using i=12% and n=5; multiply factor (3.6048) by \$9,000 PV of stream of interest payments = \$32,443 Total Bond Price = \$56,743 + \$32,433 = \$89,186 o When market interest rate > stated interest rate, the bond is sold at a discount o When market interest rate < stated interest rate, the bond is sold at a premium Recording a bond issued at par value: o Cash \$100,000 Bond Payable \$100,000 Recording a bond issued at premium: o Cash \$102,500 Premium on Bond Payable \$2,500 Bond Payable \$100,000

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Recording a bond issued at discount: o Cash \$97,000 Discount on Bond Payable \$3,000 Bond Payable \$100,000 The discount or premium is shown next to the Bond Payable on the Long-term Liability section of the balance sheet Discount on Bond Payable is a contra-account, so it has a debit balance Amortizing a bond discount or premium – you must minimize the amount of discount/premium as the bond is repaid o Straight line method: discount/premium ÷ number of interest periods (same every period)
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}