Question:
Johnson & Johnson is one of the world’s largest manufacturers of health care products. The company’s
2010 financial statements included the following information in the long-term debt disclosure note:
The disclosur note stated that the debenture bonds were issued early in 2000 and have a maturity value of
$272.5 million. The maturity value indicates the amount that Johnson & Johnson will pay bondholders in
2020.
Each individual bond has a maturity value (face amount) of $1,000. Zero-coupon bonds pay no cash
interest during the term to maturity. The company is “accreting” (gradually increasing) the issue price to
maturity value using the bonds’ effective interest rate computed on a semiannual basis.
Required:
1. Determine the effective interest rate on the bonds.
2. Determine the issue price in early 2000 of a single, $1,000 maturity-value bond.
Answer:
Requirement 1
The effective interest rate can be determined by solving for the unknown present value of $1 factor for 20
semiannual periods (2011–2020):
PV of $1 factor = $ 194 = .71193
$272.5
Present value of $1: n = 20, i = ? (from Table 2, i = approximately 1.5%)
Johnson & Johnson is one of the world’s largest manufacturers of health care products. The company’s
2010 financial statements included the following information in the long-term debt disclosure note:
The disclosur note stated that the debenture bonds were issued early in 2000 and have a maturity value of
$272.5 million. The maturity value indicates the amount that Johnson & Johnson will pay bondholders in
2020.
Each individual bond has a maturity value (face amount) of $1,000. Zero-coupon bonds pay no cash
interest during the term to maturity. The company is “accreting” (gradually increasing) the issue price to
maturity value using the bonds’ effective interest rate computed on a semiannual basis.
Required:
1. Determine the effective interest rate on the bonds.
2. Determine the issue price in early 2000 of a single, $1,000 maturity-value bond.
Answer:
Requirement 1
The effective interest rate can be determined by solving for the unknown present value of $1 factor for 20
semiannual periods (2011–2020):
PV of $1 factor = $ 194 = .71193
$272.5
Present value of $1: n = 20, i = ? (from Table 2, i = approximately 1.5%)
