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Chapter 12: Q14SE (page 658)

Determining the present value of bond at issuance

On December 31, 2018, when the market interest rate is 12%, Benson Realty issues

$600,000 of 9.25%, 10-year bonds payable. The bonds pay interest semi annually.

Determine the present value of the bonds at issuance.

Short Answer

Expert verified

The present value of the bond as issuance is $505,493

Step by step solution

01

Definition of cash flow

The cash flow the inflow and outflow of the cash and other items which are equivalent to the cash during a period.

02

Present value of the bonds at issuance

Present value of principal:

Present Value= Future Value× PV factor of i=6%, n=20=$600,000× 0.312=$187,200 

Present value of interest:

Present Value= Amount of each cash flow  × Annuity  PV factor of i=6%, n=20=$27,750× 11.470=$318,293 

Present value at issuance:

Present Value= Present  Value  of  Principal+ Present  Value  of Interest= $187,200+ $318,293= $505,493

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Most popular questions from this chapter

Your grandfather would like to share some of his fortune with you. He offers to give

you money under one of the following scenarios (you get to choose):

1. \(8,750 per year at the end of each of the next six years

2. \)49,650 (lump sum) now

3. $100,450 (lump sum) six years from now

C H A P T E R 1 2

Requirements

1. Calculate the present value of each scenario using a 6% discount rate. Which scenario

yields the highest present value? Round to the nearest dollar.

2. Would your preference change if you used a 12% discount rate?

Why would a company choose to issue bonds instead of issuing stock?

Journalizing bond transactions

Power Company issued a $1,000,000, 5%, 5-year bond payable at face value on

January 1, 2018. Interest is paid semiannually on January 1 and July 1.

Requirements

1. Journalize the issuance of the bond payable on January 1, 2018.

2. Journalize the payment of semiannual interest on July 1, 2018.

What does it mean when a company calls a bond?

In regard to a bond discount or premium, what is the straight-line amortization

method?
See all solutions

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