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Grand Company authorized $150,000 of 5-year bonds dated January 1, 2006. The stated rate of interest was 14%, payable each December 31.

Grand Company authorized $150,000 of 5-year bonds dated January 1, 2006. The stated rate of interest was 14%, payable each December 31. The bonds were issued on January 1, 2006, when the market interest rate was 12%. Assume effective-interest amortization. (The present value factor for $1 at 6% for 10 periods is 0.5584, for $1 at 7% for 10 periods is 0.5083, for $1 at 14% for 5 periods is 0.5194, and for $1 at 12% for 5 periods is 0.5674. The present value of an annuity of $1 for 10 periods at 6% is 7.3601, for 10 periods at 7% is 7.0236, for 5 periods at 6% is 4.2124, and for 5 periods at 7% is 4.1002.) Round to the nearest dollar.

(a) What would be the amount of premium amortization for December 31, 2006?
(b) What would be the amount of the interest payment on December 31, 2006?

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CH240310_5778_FIN.doc

Solution:
Market Rate of Interest = 12%
Rate of Interest on Bonds = 14%
The Face Value of the Bonds is $150,000 to be paid at the end of 5 years
Present Value of Principal:
= $150,000 * PV Factor...

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