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Bond issuance

Co issued $750,000 of 4%, 12-year bonds on 10/1/05 plus accrued interest at a time when the market rate of interest was 6%. The bonds have an authorized date of 8/1/05 and pay interest each 2/1 and 8/1. The effective-interest method is used to amortize any discount or premium.

Compute the:
1) semi-annual interest payment
2) issue price of the bond
3) the amount of discount or premium (indicate which one) for which the bond was issued

CLUE must MATCH: Carry value of bonds at 8/1/06 is $630,470

Solution Preview

1. The semiannual payment is the amount of interest which is paid every six months. This is the annual interest divided by 2. The face value of the bond is 750,000 and the copuon rate is 4%. The annual interest is 750,000X4%=30,000. The semiannual interest payment is 30,000/2=15,000

2. The market interest rate is 6%. The issure price would be such that the effective interest to the investors would be 6%. If the ...

Solution Summary

The solution explains how to calculate the issue price given that coupon rate is different from market rate.

$2.19