Question

Exercise 14-10 (Algo) Issuance of bonds; effective interest; amortization schedule [LO14-2] National Orthopedics Co. Issued 8% bonds, dated January 1, with a face amount of $600,000 on January 1, 2021. The bonds mature on December 31, 2024 (4 years). For bonds of similar risk and maturity the market yleld was 10%. Interest is pald semiannually on June 30 and December 31. (FV of $1. PV of $1. FVA of $1. PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Determine the price of the bonds at January 1, 2021.

Answer 1

1) Table values are based on: n = 8 Í = 5.0% Cash Flow: Amount Interest $24,000 $155,117 Principal $600,000 $406,104 Price of bonds $561,221 Workings: As interest is paid semiannually, the applicable discount rate is: 10% / 2 = 5%; Number of periods to maturity = 4 years x 2 = 8 periods. Therefore, Semiannual coupon payments Annuity factor @ 5% for 8 periods Present value of annual cost savings Bond's maturity value at the end Present value factor @ 5% for 8 periods Present value of salvage value Price of Bonds $24,000 ($600000 x 8% / 2] 6.46321 [Traced from ordinary annuity factor table PVA of $1, rounded off to 5 decimal places] $ 155,117 ($24000 x 6.46321] $600,000 0.67684 [Traced from present value factor table PV of $1, rounded off to 5 decimal places] $406,104 ($600000 x 0.67684] $561,221 ($155117 + $406104)