Question

The following Sweetwater Corporation transactions are for bonds that were purchased as a trading investment for the year ended December 31, 2021: Feb. 1 Purchased $244,000 of Leslye Corporation 3% bonds at 106 (this means 106% of maturity value). Interest is received semi-annually on August 1 and February 1. The bonds mature on February 1, 2023. Aug. 1 Received interest on Leslye bonds. 2 Sold $97,600 of the Leslye bonds at 101. Dec. 31 Accrued interest on the remaining bonds. 31 The fair value of the remaining bonds was 100 on this date. Show how the investments would be presented on the statement of financial position at December 31,2021 . (Round answers to 0 decimal places, e.g. 5,250

Answer 1

With the rise in interest rates to 9%, you would expect to pay less than $10,000 for the bond. The calculations based on present value discounting show that you would be willing to pay approximately $9,724.77 for the bond.

Step-by-step explanation:

Considering a local water company that issued a $10,000 ten-year bond with 6% interest rate, and now, one year before maturity, the prevailing interest rates have risen to 9%:

• You would expect to pay less than $10,000 for this bond because the market rate of 9% is higher than the bond's coupon rate.
• To calculate the price you would be willing to pay for the bond:
  The bond will pay $600 in interest (6% of $10,000) in one year, plus the principal amount of $10,000 at maturity. The present value of these amounts, discounted at the new market rate of 9%, will give you the maximum price you should be willing to pay.
• The present value (PV) calculations are as follows:
  PV = Interest / (1 + r) + Principal / (1 + r)
  PV = $600 / (1 + 0.09) + $10,000 / (1 + 0.09)
  PV = $550.46 + $9,174.31
  PV = $9,724.77

Therefore, you would be willing to pay approximately $9,724.77 for the bond, considering the increased interest rate.