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8% Bond Bond Issue Face Value Number of Bonds Coupon Rate Market yield Semi - Annual coupon payment

Period till maturity (No of Semi- annual)

10,000,000 1,000 10,000 8% 9% 400,000 40

6%

6% Bond Bond Issue Face Value Number of Bonds Coupon Rate Market yield Semi - Annual coupon payment Period till maturity (No of Semi- annual) Question 1 Premium & Discount as it relates to Bonds When Market Value of bond is more than its par value then bond is said to be trading at premium. This happens when the coupon rate is more than the market rate of interest. When Market value of bond is less than its par value then bond is said to be trading at discount. This happens when the coupon rate is less than the market rate of interest. An issuer has to amortize the discount or premium over the life of the bond.

10,000,000 1,000 10,000 6% 6% 300,000 20

11,541,500 1,000 11,542 6% 6% 346,245 20

Proceed from Issue (Q1, Part B) PV of Interest payments

Part A
$9,079,921

No of Coupon payment made till 31 Dec 2006 No of Coupon payment made till 31 Dec 2007 PV of bond payable (Q1, Part C) - on 31st Dec 2006 - on 31st Dec 2007

15 17

Part B

Proceeds from issue

9,079,921

Part C
$9,258,590 9,292,611

Re-compute amount shown in BS 31st Dec 2006 31st Dec 2007
Note - The last coupon payment due on 2nd Jan has been transferred to Current liability and hence "# of coupon payments made" has been increased by 1 in both cases.

9,258,590 9,292,611

MV of bond payable (Q1, Part D)

Part D
No of Coupon payment remaining 31 Dec 2008 PV of future cash flow at 6% discount Repurchase price of 8% Bond Number of Bonds Amount 21 $11,541,502 1,154 10,000 11,541,500

Current MV
Note - The last coupon payment due on 2nd Jan has been transferred to Current liability and hence "No of coupon payments remaining" has been increased by 1.

11,541,502

Question 2 Part A
Cash Flows

Proceed from fresh 6% Bond issue Cash from own account (Q2, Part A)

10,000,000 1,541,500

In case of repurchase of bond - Additional Cash outflow of $ 1,541,500 in current year. For following year interest saving or less cash outflow of $ 200,000 every year. Principal payment will be advanced by six months in 2019 and resultant saving in interest obligation of $ 400,000

500 11.8% Bond or 6% Bond (Solution 3) 11.Part B PV of bond payable Current year earning Current year earning will fall by $ 2. Also there will be one less interest payment in case of re-issue 100% of funding from bond issue Par value Numbers of bonds Better Option .on 31st Dec 2008 Loss on retirement of bonds (Q2.329.000 1. Hence Lyons Document storage Corp should be indifferent under both decisions.211.502 6% Bond In case $ 10 million bond issued + Cash funding PV of Cash outflow in case of 6% bond Pv of Cash funding 10.54 million in current year.541.000 every year.500 0 In case entire funding from bond issue Difference in two cash outflows . In our calculation we have adjusted for interest accrual and payment in June 2008 and restatement to current liability of interest due on 2nd Jan 2009. it would lead to negative cash flow of $ 1.736 ($ 2. it is not worthwhile to re-purchase the bond.764 Part C 2. which is calculated as the difference between current MV and book value as on 31 Dec 2007. 8% Bond PV of Cash outflow in case of 8% bond 11.542 Solution 3 As seen the Pv of cash outflow from current 8% bond is same as in case of issue of 6% bond.736 Future year earning In case of re-issue of bond interest expense will be reduced by $ 100. Part B) 19 9. Based on above we recommend not to retire old bond.24 million. Further if only $10 million worth of bonds are issued.000 every semi-annual or $ 200.The amount of loss given in question is $ 2.500 11.541.24 million in current year without any real net benefit. As re-purchase of bond will lead to loss of $ 2.211.24 mn) on account of loss on re-purchase of bond. Note .000.500 1. No of Coupon payment made till 31 Dec 2008 .542 Part D New Bond Issue 11.000 11.541.541.541.