Fall 2010_Section Problem Set 9 (Chap 10)

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

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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
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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)
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This note was uploaded on 11/02/2011 for the course AEM 2210 taught by Professor Little,j. during the Spring '07 term at Cornell University (Engineering School).

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

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