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Alisiya [41]
3 years ago
5

Bond prices and yields Assume that the Financial Management​ Corporation's ​$1 comma 000​-par-value bond has a 7.800 % ​coupon,

matures on May​ 15, 2027, has a current price quote of 106.124 and a yield to maturity​ (YTM) of 6.588 %. Given this​ information, answer the following​ questions: a. What was the dollar price of the​ bond? b. What is the ​bond's current​ yield? c. Is the bond selling at​ par, at a​ discount, or at a​ premium? ​ Why? d. Compare the​ bond's current yield calculated in part b to its YTM and explain why they differ.
Business
1 answer:
Neporo4naja [7]3 years ago
3 0

Answer:

(a) Dollar price of the​ bond = Par value × Current price percentage

                                             = $1,000 × 106.124%

                                             = $1,061.24

(b) Bond's current yield:

Annual interest paid in dollars = Bond par value × Rate of interest

                                                  = $1,000 × 7.8%

                                                  = $78

Current\ yield = \frac{Interest}{Bond\ value}

Current\ yield = \frac{78}{1,061.24}

                              = 0.0734

                              = 7.34%

(c) Issue price of bond is $1,000 and current maturity price is $1,061.24. Thus, bond price is greater than the par value.

(d) Current yield is the return on bond at current price. Yield to maturity is 6.588 % and current yield is 7.34%. Since the current price is more than the par value, therefore, YTM is lower than the current yield.

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A. January 1 balances in T-accounts:

                                         Common Stock

                                                Jan. 1     Balance b/d        $7,500,000

                                        Additional Paid-in Capital -Common Stock

                                                Jan. 1     Balance b/d        $825,000

                                        Retained Earnings

                                                Jan. 1     Balance b/d        $33,600,000

                                        Treasury Stock

Jan. 1  Balance b/d $450,000

B1. Journal entries to record the transactions:

Jan. 22

Debit Dividends Payable $28,000

Credit Cash Account $28,000

To record payment of $0.08 dividends per share.

April 10

Debit Cash Account $1,800,000

Credit Common Stock $1,500,000

Credit Additional Paid-in Capital $300,000

To record the issue of 75,000 shares for $24 per share.

June 6

Debit Cash Account $650,000

Credit Treasury Stock $450,000

Credit Additional Paid-in Capital $200,000

To record reissue of 25,000 shares of treasury stock at $26 per share and close the Treasury Stock balance to Additional Paid-in Capital.

July 5

Debit Stock Dividends $450,000

Credit Dividends Payable $450,000

To record the declaration of the 4% stock dividend on 450,000 shares of common stock.

August 15

Debit Dividends Payable $450,000

Credit Common Stock $360,000

Credit Additional Paid-in Capital $90,000

To record the  issue of a 4% stock dividend certificates on 450,000 shares at $25

Nov. 23

Debit Treasury Stock $570,000

Credit Cash Account $570,000

To record the purchase of 30,000 shares of treasury stock for $19 per share.

Dec. 28

Debit Dividends $42,000

Credit Dividends Payable $42,000

To record the declaration of a $0.10 per share dividend on 420,000 shares of common stock.

Dec. 31

Debit Income Summary Account $1,125,000

Credit Retained Earnings $1,125,000

To close the credit balance of the income summary.

Dec. 31

Debit Retained Earnings $492,000

Credit Stock Dividends $450,000

Credit Dividends $42,000

To close the two dividends accounts.

B2) Posting to the selected accounts:

                                        Common Stock

Dec. 31 Balance c/d  $9,360,000 Jan. 1    Balance b/d         $7,500,000

                                                        Apr. 10  Balance b/d         $1,500,000

                                   <u>                   </u>  Aug 15  Dividend Payable  <u>$360,000</u>

                                  <u>$9,360,000 </u>                                          <u>$9,360,000</u>

                                                        Jan. 1 Balance b/d           $9,360,000

                                        Additional Paid-in Capital -Common Stock

Dec. 31 Balance c/d $1,415,000 Jan. 1   Balance b/d               $825,000

                                                   Apr. 10     Balance b/d            $300,000

                                                   Jun. 6   Treasury Stock         $200,000

                                <u>                 </u>  Aug 15  Dividend Payable      <u> $90,000</u>

                               <u> $1,415,000</u>                                               <u>$1,415,000</u>

                                                   Jan. 1 Balance b/d                $1,415,000

                                        Retained Earnings

Dec. 31 Stock Dividends   $450,000 Jan. 1    Balance b/d       $33,600,000

Dec. 31 Dividends               $42,000 Dec. 31  Income Summary $1,125,000

Dec. 31 Balance c/d     <u>$34,233,000</u>                                          <u>                     </u>

                                    <u>$34,725,000</u>                                          <u>$34,725,000</u>

                                                           Jan. 1 Balance b/d           $34,233,000

                                        Treasury Stock

Jan. 1      Balance b/d $450,000  Jun. 6 Cash                          $450,000

Nov. 23  Cash            <u>$570,000</u>   Dec. 31 Balance c/d             <u>$570,000</u>

                                <u>$1,020,000</u>                                               <u>$1,020,000</u>

Jan. 1   Balance b/d   $570,000

                                        Dividends Payable

Jan. 22  Cash                    $28,000  Jan. 1 Balance b/d             $28,000

Aug. 15 Common Stock $360,000   Jul. 5 Stock Dividends   $450,000

Aug. 15 Additional Paid-in$90,000   Dec. 23 Cash Dividends $42,000

Dec. 31 Balance c/d          <u>$42,000</u>                                           <u>                </u>

                                       <u>$520,000</u>                                          <u>$520,000</u>

                                                           Jan. 1 Balance b/d           $42,000

                                        Stock Dividends

Jul. 5 Dividends Payable $450,000 Dec. 31 Retained Earnings $450,000

                                      Cash Dividends

Dec. 28 Dividends Payable $42,000 Dec. 31 Retained Earnings $42,000

 

                                       Income Summary Account

Dec. 31  Retained Earnings $1,125,000 Dec. 31 Balance b/d   $1,125,000

C. Retained Earnings Statment for the year ended December 31, 2016:

Beginning Balance     $33,600,000

Income Summary           $1,125,000

Stock Dividends             ($450,000)

Cash Dividends               ($42,000)

Ending Balance         $34,233,000

Explanation:

a)                                       Cash Account                                                            

Apr. 10   Common Stock  $1,500,000 Jan. 22  Dividends Payable$28,000

April 10  Additional Paid-in $300,000  Nov. 23 Treasury Stock   $570,000

Jun. 6    Treasury Stock     $450,000  

Jun. 6    Additional Paid-in $200,000

6 0
3 years ago
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