[Anonymous]

On January 2, Year 1, the Lyndhurst Company, Inc. a privately-held company, issued $1,000,000, five-year, 10.00% bonds, dated January 2, Year 1. The bonds provided for semi-annual interest payments to be made on June 30 and December 31 of each year. Terms of the bond indenture allowed the company to call the bonds at 102 after one year. The bonds were issued when the market interest rate was 8.00%.

—Lyndhurst uses the effective interest method for amortizing bond discounts and premiums.

—The bonds are term bonds that mature on December 31, Year 5.

—Lyndhurst’s fiscal year for financial reporting purposes is December 31.

—The company called the bonds at 102 on June 30, Year 2

Now its telling me to enter “compounding periods & Interest expense”

For Principal and Interest. I know the periods are 10 for both and the INT expense is 4%, but why dont we use 5% (10%/2) for the principal..? I thought it was coupon x face value.

The answer shows 4% for both.

[Anonymous]

Bump!

[Kru]

I agree with you it can't be 4% for both, interest expense and cash payments.

If the question is referring to only interest expense, then it should be 4% – the market rate of net liability, and 5% for the cash payments – face value x coupon or stated rate.

so then a sample J/E for the first interest payment using effective interest method would be….

Dr Interest Expense (4% x 102)

Dr Premium on Bond (Cash Pmt minus Interest Expense) or Plug-in.

Cr Cash (5% x 100)

I don't know what else to say…!!

AUD - 82p
FAR - 69, 72, 75p
BEC - 09/2012
REG - 10 or 11/2012

Using CPAExcel, Gleim for SIMs, and Red Bull

[Anonymous]

bump on this..

[stealth]

I've spent time looking at a similar item. Due your own due diligence, but my take is:

Yes, annualize the semi-annual payments: double the periods, 1/2 the interest.

5-years, 10% Stated Interest becomes 10 compounding periods, 5%

Use the Stated rate to compute each Interest PAYMENT 1M x (10% x 6/12) = 1M x 0.05 =50K

5-years, 8% Market Interest at issue becomes 10 compounding periods, 4%

These bonds are selling at a premium. Face value is 1M. What is the Issue Price?

Issue Price is: PV of Principal + PV of Interest

PV of Principal: 1M x (PVof1, 10, MARKET Interest rate, 0.04, or 0.67556) = 675,560

PV of Interest: {1M x STATED Interest Rate (0.05)} x (PVofOA, 10, 0.04, or 8.1109) =50K x 8.11090 = 405,545

Thus, issue price is 675,560 + 405,545 = 1,081,105

Face is 1M

Premium is 81,105.

C2, you have to input the (Market) Interest Rate or “amortization interest rate”, which is still 4% or 0.04, no?

It's not using the Market interest rate to compute anything in that first row. It's just something to fill in, no?

[Author]

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