41 42 43 44 45 46 47 QUESTION 12 Assume that the following i

41 42 43 44 45 46 47 QUESTION 12 Assume that the following information is relevant for one of the bond issues of Chris Company: Face value Bond term Stated interest rate Market interest rate Issue date nterest payment dates June 30 and December 31 each year (paid semiannually) $800,000 15 years 12% 8% July 1, 2012 The total amount of interest to be paid over the life of the bonds is: $1,440,000o $960,000. $720,000. $1,200,000. none of the above. Click Save and Submit to save and submit. Click Save All Answers to save all answers.

Solution

Answer = 1) Total interest paid over the life = interest per year on bond X No. of Years of Bonds Interest Per year = $ 800,000 X 12% = $                           96,000 Multiply with \" X \" by No. Of years = 15 Years Total interest = $                     14,40,000 Answer = Option 1 = $ 1,440,000 Answer = 2) CALCULATION OF iSSUE VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY Step 1 : Calculation of Annual Coupon Payments Par value of the bond issued is   = $8,00,000 Million Annual Coupon % 12.00% Annual Coupon Amount $96,000.00 Million Semi Annual Coupon Amount $48,000.00 Million Step 2: Calculate number of years to Maturity Number of years to maturity = 15 years Interest is paid semi annyally so total period = 15 Years * 2 = 30 Periods Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds Market rate of interest or Yield to Maturity or Required Return = 8% Bonds interest is paid semi annualy means so discounting factor = 8 % /2= 4 % PVF = 1 / Discount rate = 1/ 1.04 Result of above will again divide by 1.04, repeat this lat period Period Interest Amount (In Million) PVF @ 4% PresentValue 1 Interest $48,000.00                     0.9615 $46,153.85 2 Interest $48,000.00                     0.9246 $44,378.70 3 Interest $48,000.00                     0.8890 $42,671.83 4 Interest $48,000.00                     0.8548 $41,030.60 5 Interest $48,000.00                     0.8219 $39,452.50 6 Interest $48,000.00                     0.7903 $37,935.10 7 Interest $48,000.00                     0.7599 $36,476.06 8 Interest $48,000.00                     0.7307 $35,073.13 9 Interest $48,000.00                     0.7026 $33,724.16 10 Interest $48,000.00                     0.6756 $32,427.08 11 Interest $48,000.00                     0.6496 $31,179.88 12 Interest $48,000.00                     0.6246 $29,980.66 13 Interest $48,000.00                     0.6006 $28,827.56 14 Interest $48,000.00                     0.5775 $27,718.80 15 Interest $48,000.00                     0.5553 $26,652.70 16 Interest $48,000.00                     0.5339 $25,627.59 17 Interest $48,000.00                     0.5134 $24,641.92 18 Interest $48,000.00                     0.4936 $23,694.15 19 Interest $48,000.00                     0.4746 $22,782.84 20 Interest $48,000.00                     0.4564 $21,906.57 21 Interest $48,000.00                     0.4388 $21,064.01 22 Interest $48,000.00                     0.4220 $20,253.86 23 Interest $48,000.00                     0.4057 $19,474.86 24 Interest $48,000.00                     0.3901 $18,725.83 25 Interest $48,000.00                     0.3751 $18,005.61 26 Interest $48,000.00                     0.3607 $17,313.08 27 Interest $48,000.00                     0.3468 $16,647.20 28 Interest $48,000.00                     0.3335 $16,006.92 29 Interest $48,000.00                     0.3207 $15,391.27 30 Interest $48,000.00                     0.3083 $14,799.30 30 Bond Principal Value $8,00,000.00                     0.3083 $2,46,654.93 $10,76,672.53 Working notes EFFECTIVE - INTEREST AMORTIZATION SCHEDULE MARKET RATE OF INTEREST IS 6% AND BOND INTEREST IS 7% Date Interest payment on face value Interest Expenses (Cash paid - Decrease in Carrying value) Amortization expenses Credit Balance in bond discount Credit Balance in acct payable book Value of the bond 0 06/30 $                                                                             -   $                                    -   $                          -   $         2,76,673 $          8,00,000 $       10,76,673 1 12/31 $                                                                    48,000 $                     38,777.58 $             9,222.42 $         2,67,450 $          8,00,000 $       10,67,450 Interest expenses for the year ended = $                     38,777.58 So, answer = Option 5 = None of the above Answer = 3) At maturty of bond the par value will be pay to bondholders. So, Answer = Option 2 = $ 800,000