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Mila [183]
3 years ago
12

On January 1 of this year, Ikuta Company issued a bond with a face value of $115,000 and a coupon rate of 4 percent. The bond ma

tures in 3 years and pays interest every December 31. When the bond was issued, the annual market rate of interest was 5 percent. Ikuta uses the effective-interest amortization method. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your answers to whole dollars.)
Prepare a bond amortization schedule for all three years of the bond's life.
Business
1 answer:
gulaghasi [49]3 years ago
4 0

Answer:

The carrying value at year three end is $115,000.

Explanation:

The bond amortization schedule shows the how the interest expense is calculated as well as the coupon payment at each year end.

The carrying value at each year end is the opening carrying value in that year plus interest expense(as % of opening carrying value) minus the coupon payment(as % of face value).

In the beginning carrying value is the price the bond was issued,which could be computed using the pv formula in excel.

=-pv(rate,nper,pmt,fv)

the rate is yield to maturity of 5%

nper is the number of coupon payments to be made by the bond,which is 3

pmt is the yearly coupon payment which is:$115,000*4%=$4,600

fv is the face value of $115,000

=-pv(5%,3,4600,115000)=$111,868.26

Find attached amortization schedule.

Download xlsx
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Answer:

1) July 1, 2021, bonds purchased at a premium

Dr Investment in bonds 230,000,000

Dr Premium on bonds 30,000,000

    Cr Cash 260,000,000

Sine the price paid for the bonds was higher than the face value, they were purchased at a premium.

2) December 31, 2021, coupon payment received from investment in bonds

Dr Cash 9,200,000

    Cr Interest revenue 7,800,000

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amortization of bond premium = (260,000,000 x 3%) - 9,200,000 = -1,400,000

3) investment in bonds balance = $260,000,000 - $1,400,000 = $258,600,000

4) January 2, 2022, bonds sold

Dr Cash 270,000,000

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Gain on sale = selling price - carrying value of investment = $270,000,000 - $258,600,000

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3 years ago
A retired woman has $180,000 to invest. she has chosen one relatively safe investment fund that has an annual yield of 9% and an
Zepler [3.9K]
Solution:  
Let the amount invested in scheme which yields 9% be x and amount invested in scheme which yields 13% be y.  
x + y = 180000 --equation 1 
0.09x + 0.13y = 18000 --equation 2  
Balancing the equations, multiply equation 1 with 0.09 and equation 2 with 1,  
0.09x + 0.09y = 16200 -equation 3
 0.09x + 0.13y = 18000 --equation4  
Subtracting equation 4 from 3, 
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y = 45000 
 Now putting value of y in equation 1, 
 x + 45000 = 180000 
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 The amount to be invested in scheme which yields 13% = $45,000
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Consider the following scenario analysis:Rate of Return Scenario Probability Stocks BondsRecession 0.20 -4 % 16 %Normal economy
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Answer and Explanation:

a. Here it is reasonable to presume that the treasury bond generates high returns when there is a recession.  

b. The calculation of the expected rate of return and the standard deviation for each investment is shown below:

For stocks

= (Expected return of the boom × weightage of boom) + (expected return of the normal economy × weightage of normal economy) + (expected return of the recession × weightage of recession)  

= (29% × 0.30) + (18% × 0.50) + (-4% × 0.20)  

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For bonds  

= (Expected return of the boom × weightage of boom) + (expected return of the normal economy × weightage of normal economy) + (expected return of the recession × weightage of recession)  

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Now the standard deviation calculation is to be shown in the excel spreadsheet

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c. The investment that should be prefer could be computed by determine the coefficient of variation which is shown below:

Formula i.e. used is

= Standard deviation ÷ expected return

For stock, it is

= 16.9% ÷ 11.48%

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= 9.5% ÷ 3.5%

= 2.71

Since for the bonds the coefficient of variation is greater so the same is to be considered

Therefore the bond should be prefer

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