Bao Capital issed a 5-year $50 million face 6% s
Bao Capital issed a 5-year, $50 million face, 6% semiannual bond when market interest rates were 7%.The market yield of the bonds was 8% at the beginning of the next year.What is the initial balance sheet liability, and what is the interest expense that the company should report for the first half of the second year of the bond’s life (the third semiannual period)”
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2024-10-27 12:38:33
Ans:A.
This is a discount bond since the market interest rate at issuance exceeds the coupon rate.The initial liability is equal to the proceeds received when the bond was issued.We can find this amount from the following calculation:
FV=50,000,000; N=10; I=3.5; PMT=1,500,000;CPT→PV=$47,920,848.67.
Change N to 8 and calculate PV to get liability value at the beginning of the second year of the bond’s life, 48,281,511.Interest expense for the next semiannual period is 48,281,511(0.035)=$1,689,853.
The subsequent change in the market rate has no effect on the amortization of the discount.
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