On January 1, 1995, Debtor Corporation issued 10,000 five -year bonds with a face value of $1,000 and an annual coupon of 4 percent. Bonds of similar risk were yielding eight percent p.a. in the market at the time.
a) What did the firm receive for each bond issued?
At the end of 1995, the market was still yielding 8 percent on the bonds
b) What was the firm's borrowing cost before tax for 1995?
At the end of 1996, the yield on the bonds had dropped to 6 percent.
c) How much interest expense was reported on the income statement for 1996?
Creditor Corporation purchased 2,000 of the bonds in the issue. FASB Statement No. 115 requires firms to mark these Financial Statements to market.
d) What were bonds carried on the balance sheet at the end of 1996?
This solution shows step-by-step calculations in an Excel file to determine sale price of bonds, borrowing cost, interest expense in 1996, and the price of bond in 1996.