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Original 1598896690 HW Due - Session 11
Original 1598896690 HW Due - Session 11
Becca Company is considering the issue of $100,000 face value, ten-year term
bonds. The bonds will pay 6% interest each December 31. The current market rate is
6%; therefore, the bonds will be issued at face value.
Required
1. For each of the following situations, indicate whether you believe the company will
receive a premium on the bonds or will issue them at a discount or at face value.
Without using numbers, explain your position.
a. Interest is paid semiannually instead of annually.
b. Assume instead that the market rate of interest is 7%; the nominal rate is still 6%.
2. For each situation in part (1), prove your statement by determining the issue price of
the bonds given the changes in (a) and (b).
McGee Company issued $200,000 face value bonds at a premium of $4,500. The
bonds contain a call provision of 101. McGee decides to redeem the bonds due to a
significant decline in interest rates. On that date, McGee had amortized only $1,000
of the premium.
Required
1. Calculate the gain or loss on the early redemption of the bonds.
2. Calculate the gain or loss on the redemption assuming that the call provision is 103 instead
of 101.
3. Indicate where the gain or loss should be presented on the financial statements.
4. Why do you suppose the call price is normally higher than 100?