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Montano1993 [528]
3 years ago
5

Both Bond Bill and Bond Ted have 5.8 percent coupons, make semiannual payments,

Business
1 answer:
viva [34]3 years ago
5 0

Answer:

a.

Percentage change in Bill Price = (91.8486 - 100) / 100 = -0.0815 or -8.15%

Percentage change in Bill Price = (78.1448 - 100) / 100 = -0.2186 or -21.86%

b.

Percentage change in Bill Price = (109.0298 - 100) / 100 = 0.0903 or 9.03%

Percentage change in Bill Price = (132.0946 - 100) / 100 = 0.3209 or 32.09%

Explanation:

To calculate the percentage change in the price of both the bonds, we assume that the par value of both the bonds is $100 each.

a.

To calculate the price of the bond today, we will use the formula for the price of the bond. We assume that the interest rate provided is stated in annual terms. As the bond is a semi annual bond, the coupon payment, number of periods and semi annual YTM will be,

Coupon Payment (C) both Bill and Ted = 100 * 0.058 * 6/12 = $2.9

Total periods (n) - Bill= 5 * 2 = 10

Total periods (n) - Ted= 25 * 2 = 50

As the bonds were previously price at par, the YTM or market interest rate would have been same as the coupon rate. Thus, the old market interest rate was 5.8%. Now as the interest rates have risen by 2% new interest rate will be = 5.8 + 2 = 7.8%

New r or YTM - both Bill and Ted = 7.8% * 6/12 = 3.9% or 0.039

The formula to calculate the price of the bonds today is attached.

Bond Price - Bill = 2.9 * [( 1 - (1+0.039)^-10) / 0.039]  +  100 / (1+0.039)^10

Bond Price - Bill = $91.8486

Percentage change in Bill Price = (91.8486 - 100) / 100 = -0.0815 or -8.15%

Bond Price - Ted = 2.9 * [( 1 - (1+0.039)^-50) / 0.039]  +  100 / (1+0.039)^50

Bond Price - Ted = $78.1448

Percentage change in Bill Price = (78.1448 - 100) / 100 = -0.2186 or -21.86%

b.

As the bonds were previously price at par, the YTM or market interest rate would have been same as the coupon rate. Thus, the old market interest rate was 5.8%. Now as the interest rates have fallen by 2% new interest rate will be = 5.8 - 2 = 3.8%

New r or YTM - both Bill and Ted = 3.8% * 6/12 = 1.9% or 0.019

The formula to calculate the price of the bonds today is attached.

Bond Price - Bill = 2.9 * [( 1 - (1+0.019)^-10) / 0.019]  +  100 / (1+0.019)^10

Bond Price - Bill = $109.0298

Percentage change in Bill Price = (109.0298 - 100) / 100 = 0.0903 or 9.03%

Bond Price - Ted = 2.9 * [( 1 - (1+0.019)^-50) / 0.019]  +  100 / (1+0.019)^50

Bond Price - Ted = $132.0946

Percentage change in Bill Price = (132.0946 - 100) / 100 = 0.3209 or 32.09%

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1. Journal Entries

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Dr.  Inventory                   $624,000

Cr.  Account Payables    $624,000

January 10

Dr.  Account Receivables $532,000

Cr.  Sales                           $532,000

January 28

Dr.  Account Receivables $175,000

Cr.  Sales                           $175,000

Dr.  Cost of Goods Sold   $276,400

Cr.  Inventory                    $276,400

January 30

Dr.  Cost of Goods Sold   $97,500

Cr.  Inventory                    $97,500

February 5

Dr.  Account Receivables $70,000

Cr.  Sales                           $70,000

Dr.  Cost of Goods Sold   $39,000

Cr.  Inventory                    $39,000

February 10

Dr.  Inventory                    $1,360,000

Cr.  Account Payable       $1,360,000

February 16

Dr.  Account Receivables $1,319,500

Cr.  Sales                           $1,319,500

Dr.  Cost of Goods Sold    $718,100

Cr.  Inventory                     $718,100

February 28

Dr.  Account Receivables    $1,261,500

Cr.  Sales                              $1,261,500

Dr.  Cost of Goods Sold      $696,000

Cr.  Inventory                       $696,000

March 5

Dr.  Inventory                $1,166,880

Cr.  Account Payables $1,166,880

March 14

Dr.  Account Receivables  $1,421,000

Cr.  Sales                            $1,421,000

Dr.  Cost of Goods Sold    $793,040

Cr.  Inventory                     $793,040

March 25

Dr.  Inventory               $246,000

Cr.  Account Payable  $246,000

March 30

Dr.  Account Receivables  $1,145,500

Cr.  Sales                            $1,145,500

Dr.  Cost of Goods Sold    $644,640

Cr.  Inventory                     $644,640

* Assuming Purchases and Sales are made on Account

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Closing Inventory = $307,200

Purchases =  $3,396,880

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Gross Profit = $2,659,820

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As the prices are increasing the Inventory value using last-in, first-out will be lower because all the unit sold at last are sold and inventory of the old items which was purchased on the lower cost remains in the closing inventory. The cost of Goods sold will be higher in this case.

Explanation:

First In First out (FiFO) is an Inventory method which determines the inventory value and it requires that the unit purchased first will be sold first.

Cost of Goods Sold = Opening Inventory + Purchases - Closing Inventory

Cost of Goods Sold = $175,000 + $3,396,880 - $307,200 =

Gross Profit = Sales Value - Cost of Goods Sold

Gross Profit = $5,924,500 - $3,264,680

Gross Profit = $2,659,820

Inventory Working is made in a MS Excel File, which is attached with this answer please find it.

Download xlsx
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