Explore BrainMass

Explore BrainMass

    Using Straight-Line Amortization to Compute the Gain/Loss

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Hurst, Incorporated sold its 8% bonds with a maturity value of $3,000,000 on August 1, 2009 for $2,946,000. At the time of the sale, the bonds had 5 years until they reached maturity. Interest on the bonds is payable semiannually on August 1 and February 1. The bonds are callable at 104 at any time after August 1, 2011. By October 1, 2011, the market rate of interest has declined and the market price of Hurst's bonds has risen to a price of 101. The firm decides to refund the bonds by selling a new 6% bond issue to mature in 5 years. Hurst begins to reacquire its 8% bonds in the market and is able to purchase $500,000 worth at 101. The remainder of the outstanding bonds is reacquired by exercising the bonds' call feature. In the final analysis, how much was the gain or loss experienced by Hurst in reacquiring its 8% bonds? (Assume the firm used straight-line amortization). Show calculations.

    © BrainMass Inc. brainmass.com June 4, 2020, 2:40 am ad1c9bdddf
    https://brainmass.com/business/bond-valuation/straight-line-amortization-compute-gain-loss-473321

    Solution Preview

    Since bonds are purchased on discount, the discount would be amortized over the life of the bond
    Face Value of Bonds $3,000,000
    Purchase Value of Bonds $2,946,000
    Discount on Bonds $54,000
    We are using straight line ...

    Solution Summary

    The solution uses a straight-line amortization to compute the gain/loss experienced by Hurst in reacquiring bonds.

    $2.19

    ADVERTISEMENT