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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 Longterm
Liability section of the balance sheet
Discount on Bond Payable is a contraaccount, 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).
 Spring '07
 LITTLE,J.

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