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Coney Island Entertainment issues $1,300,000 of 7% bonds, due in 15 years, with interest payable semiannually on June 30 and December 31 each year. Required: Calculate the issue price of a bond and complete the first three rows of an amortization schedule when:1. The market interest rate is 7% and the bonds issue at face amount.2. The market interest rate is 8% and the bonds issue at a discount.3. The market interest rate is 6% and the bonds issue at a premium.

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Final answer:

When the market interest rate is equal to the bond's coupon rate, the bond will issue at face amount. When the market interest rate is higher than the bond's coupon rate, the bond will issue at a discount. When the market interest rate is lower than the bond's coupon rate, the bond will issue at a premium.

Step-by-step explanation:

When the market interest rate is equal to the bond's coupon rate, the bond will issue at face amount, which is $1,300,000. This means that the issue price of the bond will be $1,300,000.

When the market interest rate is higher than the bond's coupon rate, the bond will issue at a discount. To calculate the issue price, you need to calculate the present value of the bond's future cash flows. In this case, you would calculate the present value of the $1,080 payment one year from now and the present value of the $1,000 principal payment at the end of the bond's life.

When the market interest rate is lower than the bond's coupon rate, the bond will issue at a premium. To calculate the issue price, you need to calculate the present value of the bond's future cash flows. In this case, you would calculate the present value of the $1,080 payment one year from now and the present value of the $1,000 principal payment at the end of the bond's life.

User Cora
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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

User Lhagemann
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