Unformatted text preview: drop in market
rates will reduce the amount that Bonneville remits in periodic interest payments; regardless of
changes in market rates, Bonneville will receive the same fixed payment from the counter party.
The fixed payment received under the swap agreement will match what the stated rate of interest requires Bonneville to pay in the long term debt contract. The effect of the interest rate swap is to
hedge against changes in debt values due to changes in market rates; the variable interest
payments from the swap agreement effectively eliminate those market value changes. PROBLEMS
a. The present value of the future cash flows of this note equals $20,000. Since the effective rate of 10%
equals the stated rate of 10%, the note will be issued at par value. Consequently, the face value of this
note would be $20,000. b. The present value of the future cash flows of this note equals $20,000. Since the effective rate of 10%
exceeds the stated rate of 0%, the note will be issued at a discount. The task is to determine what
amount of cash paid at the end of two years discounted at 10% would equal $20,000 today. In other
words, $20,000 = (Face Value Present Value Factor for i = 10%, n = 2) $20,000 = Face Value .8264 (from Table 4 in Appendix A)
Face value = $24,202 (rounded)
Consequently, the face value of this note would be $24,202.
c. Note A
Cash (+A) 20,000
Notes Payable (+L)
20,000 Issued note payable for cash.
Discount on Notes Payable (–L) 20,000
Notes Payable (+L) 24,202
Issued note payable for cash.
d. Note A
Interest Expense (E, –SE) 2,000*
2,000 Made interest payment.
* $2,000 = $20,000 10% Notes Payable (–L) 20,000
Cash (–A) 20,000
Made principal payment on note payable.
Interest Expense (E, –SE) 1,782*
Discount on Notes Payable (+L) Amortized discount on notes payable. 1,782 * $1,782 = $4,202 Initial discount – $2,420 discount amortized during 2012 Notes Payable (–L) 24,202
Cash (–A) 24,202
Made principal payment on note payable. P11–2
a. The bonds will be issued at a disco...
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- Fall '08