Question

on january 1 of this year, ikuta company issued a bond with a face value of $130,000 and a coupon rate of 4 percent. the bond matures 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) note: use appropriate factor(s) from the tables provided. required: complete a bond amortization schedule for all three years of the bond's life. what amounts will be reported on the income statement and balance sheet at the end of year 1 and year 2?

Answer 1

The bond amortization schedule involves calculating the present value of a bond's future interest payments and principal repayment at the given market interest rate. A bond issued for $3,000 at an 8% interest rate has annual payments of $240, and its present value needs to be calculated using the discount rate, which may vary. The bond's value would be lower when discounted at a higher rate, such as 11%.

Step-by-step explanation:

To answer the student's question on calculating a bond amortization schedule, let's first understand the given information: Ikuta company issued a bond with a face value of $130,000, a coupon rate of 4 percent, and an annual market rate of 5 percent. Let's look at how to calculate the present value of the bond payments.

Considering a simple bond example, if a bond with a face value of $3,000 is issued at an 8% interest rate, it would pay $240 in interest each year. Using the present value formula, we can find the bond's worth today, given a certain discount rate (the market interest rate).

For instance, if the discount rate is 8%, the present value of the bond payments can be calculated using the present value of an annuity factor for the interest payments and the present value of a lump sum for the principal repayment. If the market interest rate rises to 11%, the bond's present value would decrease since the future payment's present worth is now discounted at a higher rate.