1 Since the market interest rate (7%) is equal to the bond's coupon rate (7%), the bonds will be issued at face value, which is $1,300,000
2. The issue price is $904,344.58.
How to solve
Calculating Issue Price and Amortization Schedule for Coney Island Entertainment Bonds
1. Market Interest Rate = 7%, Bonds Issue at Face Amount:
a. Issue Price:
Since the market interest rate (7%) is equal to the bond's coupon rate (7%), the bonds will be issued at face value, which is $1,300,000.
b. Amortization Schedule:
Date Interest Payment Amortization Carrying Value
Dec 31, Year 1 $45,500 ($1,300,000 x 7% x ½) $0 $1,300,000
Jun 30, Year 2 $45,500 $0 $1,300,000
Dec 31, Year 2 $45,500 $0 $1,300,000
2. Market Interest Rate = 8%, Bonds Issue at a Discount:
a. Issue Price:
Using the bond valuation formula:
Present Value = Face Value / (1 + Market Interest Rate)^n
Present Value = $1,300,000 / (1 + 8%)^30
Present Value = $904,344.58
Therefore, the issue price is $904,344.58.
b. Amortization Schedule:
Date Interest Payment Amortization Carrying Value
Dec 31, Year 1 $72,347.59 ($904,344.58 x 8% x ½) $45,655.41 $950,000
Jun 30, Year 2 $76,000 $44,000 $994,000
Dec 31, Year 2 $79,520 $42,380 $1,036,380
3. Market Interest Rate = 6%, Bonds Issue at a Premium:
a. Issue Price:
Using the bond valuation formula:
Present Value = Face Value / (1 + Market Interest Rate)^n
Present Value = $1,300,000 / (1 + 6%)^30
Present Value = $1,572,148.40
Therefore, the issue price is $1,572,148.40.
b. Amortization Schedule:
Date Interest Payment Amortization Carrying Value
Dec 31, Year 1 $39,203.66 ($1,572,148.40 x 6% x ½) $6,296.34 $1,565,852.06
Jun 30, Year 2 $38,515.84 $6,984.16 $1,558,866.22
Dec 31, Year 2 $37,826.04 $7,673.96 $1,551,192.26