Problem 1:
On January 1, Year 6, Trembley Corporation issued $1,000,000 face value, 20-year bonds. The bonds carry coupon interest of 6% per year, payable semiannually on June 30 and December 31. The bonds were initially priced on the market to yield 8%, compounded semiannually (for an effective annualized yield greater than 8 percent).
Required:
Compute the issue price of these bonds on Jan 1, Year 6.
Compute the amount of interest expense on these bonds for Year 6 (both six month periods) assuming that the firm uses the effective-interest method of amortizing bond premium or discount.
Problem 2:
XYZ Corporation sells 1 million shares of common stock for $22 per share. The articles of incorporation have set a $1 per share par value. What changes on the balance sheet because of this sale of stock – what goes up/down and by how much? Remember that the balance sheet equation will still balance after the changes.
Problem 3:
ABC has agreed to pay $10,000 per year fo the next five years, no added interest, for a machine received today. The asset and liability is to be reported at today’s value of those payments discounted at a normal borrowing rate – say 6%. At what amount would the asset and liability be reported at today? When the first payment is made at the end of year 1 how much is principal and how much is interest expense?