Question

Consolidated Enterprises issues $1 million face value, five-year bonds with a coupon rate of 6.0 percent. At the time of issuance, the market interest rate is 5.0 percent. Using the effective interest rate method of amortization, the carrying value after one year will be closest to:

Answer 1

Answer:

$1,035,459.51

Explanation:

First we must determine the issuing value:

• cash flow 1 = $60,000
• cash flow 1 = $60,000
• cash flow 1 = $60,000
• cash flow 1 = $60,000
• cash flow 1 = $1,060,000

using an excel spreadsheet to calculate the bond's price with a discount value of 5%:

the bonds were sold at $1,043,294.77

the effective interest expense = bond's price x market interest = $1,043,294.77  x 5% = $52,164.74

bond's value = bond's price - (coupon payment - effective interest) = $1,043,294.77 - ($60,000 - $52,164.74) = $1,035,459.51