Question:
On June 30, 2013, Singleton Computers issued 6% stated rate bonds with a face amount of $200 million.
The bonds mature on June 30, 2028 (15 years). The market rate of interest for similar bond issues was 5%
(2.5% semiannual rate). Interest is paid semiannually (3%) on June 30 and December 31, beginning on
December 31, 2013.
Required:
1. Determine the price of the bonds on June 30, 2013.
2. Calculate the interest expense Singleton reports in 2013 for these bonds.
Answer:
Requirement 1
To determine the price of the bonds, we calculate the present value of the 30-period annuity (30
semiannual interest payments of $6 million) and the lump-sum payment of $200 million paid at maturity
using the semiannual market rate of interest of 2.5%. In equation form,
PV = $6,000,0001 (20.93029) + 200,000,000 (.47674)
PV = $125,581,740 + 95,348,000 = $220,929,740 = price of the bonds
1
$200,000,000 x 3 % = $6,000,000
Present value of an ordinary annuity of $1: n = 30, i = 2.5% (from Table 4)
Present value of $1: n = 30, i = 2.5% (from Table 2)
Requirement 2
$220,929,740 x 2.5% = $5,523,244
Because the bonds were outstanding only for six months of the year, Singleton reports only one-half
year’s interest in 2013.
On June 30, 2013, Singleton Computers issued 6% stated rate bonds with a face amount of $200 million.
The bonds mature on June 30, 2028 (15 years). The market rate of interest for similar bond issues was 5%
(2.5% semiannual rate). Interest is paid semiannually (3%) on June 30 and December 31, beginning on
December 31, 2013.
Required:
1. Determine the price of the bonds on June 30, 2013.
2. Calculate the interest expense Singleton reports in 2013 for these bonds.
Answer:
Requirement 1
To determine the price of the bonds, we calculate the present value of the 30-period annuity (30
semiannual interest payments of $6 million) and the lump-sum payment of $200 million paid at maturity
using the semiannual market rate of interest of 2.5%. In equation form,
PV = $6,000,0001 (20.93029) + 200,000,000 (.47674)
PV = $125,581,740 + 95,348,000 = $220,929,740 = price of the bonds
1
$200,000,000 x 3 % = $6,000,000
Present value of an ordinary annuity of $1: n = 30, i = 2.5% (from Table 4)
Present value of $1: n = 30, i = 2.5% (from Table 2)
Requirement 2
$220,929,740 x 2.5% = $5,523,244
Because the bonds were outstanding only for six months of the year, Singleton reports only one-half
year’s interest in 2013.
