For the bond Issued in 1999

Par value $1,000

No. of bonds issued 10000
FV of bond $10,000,000
Coupon Rate: 8%
Coupon Payment per year: $800,000
Market Rate: 9%
Maturity (years): 20
Bond Price Calculation
Present Value of Coupon Payments: $7,360,634
Present value of Bond: $1,719,287
Price as on 2nd July, 1999: $9,079,921
Discounted by: $920,079

Premium Bond: If a bond is trading above the par value, then we can say that it is a premium bond.
This would occur if the bond offers an interest rate which is higher than the market rate. In simple
terms, investors would be ready to pay a higher value since the interest paid is higher.
Discount Bond: If a bond is trading below the par value, then we can say that it is a discount bond. This
would occur if the bond offers an interest rate which is lower than the market rate. In simple terms,
investors would prefer to pay a lesser amount since the interest offered is lower.

Balance from the

Date Coupon value Interest Expense Amortization Discount Value
7/2/1999 - $920,079
1/2/2000 $400,000 $408,596.44 $8,596.44 $911,482.79
7/2/2000 $400,000 $408,983.27 $8,983.27 $902,499.51
1/2/2001 $400,000 $409,387.52 $9,387.52 $893,111.99
7/2/2001 $400,000 $409,809.96 $9,809.96 $883,302.03
1/2/2002 $400,000 $410,251.41 $10,251.41 $873,050.62
7/2/2002 $400,000 $410,712.72 $10,712.72 $862,337.90
1/2/2003 $400,000 $411,194.79 $11,194.79 $851,143.10
7/2/2003 $400,000 $411,698.56 $11,698.56 $839,444.54
1/2/2004 $400,000 $412,225.00 $12,225.00 $827,219.55
7/2/2004 $400,000 $412,775.12 $12,775.12 $814,444.43
1/2/2005 $400,000 $413,350.00 $13,350.00 $801,094.43
7/2/2005 $400,000 $413,950.75 $13,950.75 $787,143.68
1/2/2006 $400,000 $414,578.53 $14,578.53 $772,565.14
7/2/2006 $400,000 $415,234.57 $15,234.57 $757,330.57
1/2/2007 $400,000 $415,920.12 $15,920.12 $741,410.45
7/2/2007 $400,000 $416,636.53 $16,636.53 $724,773.92
1/2/2008 $400,000 $417,385.17 $17,385.17 $707,388.74
7/2/2008 $400,000 $418,167.51 $18,167.51 $689,221.24
1/2/2009 $400,000 $418,985.04 $18,985.04 $670,236.19
7/2/2009 $400,000 $419,839.37 $19,839.37 $650,396.82
1/2/2010 $400,000 $420,732.14 $20,732.14 $629,664.68
7/2/2010 $400,000 $421,665.09 $21,665.09 $607,999.59
1/2/2011 $400,000 $422,640.02 $22,640.02 $585,359.57
7/2/2011 $400,000 $423,658.82 $23,658.82 $561,700.75
1/2/2012 $400,000 $424,723.47 $24,723.47 $536,977.29
7/2/2012 $400,000 $425,836.02 $25,836.02 $511,141.26
1/2/2013 $400,000 $426,998.64 $26,998.64 $484,142.62
7/2/2013 $400,000 $428,213.58 $28,213.58 $455,929.04
1/2/2014 $400,000 $429,483.19 $29,483.19 $426,445.85
7/2/2014 $400,000 $430,809.94 $30,809.94 $395,635.91
1/2/2015 $400,000 $432,196.38 $32,196.38 $363,439.52
7/2/2015 $400,000 $433,645.22 $33,645.22 $329,794.30
1/2/2016 $400,000 $435,159.26 $35,159.26 $294,635.05
7/2/2016 $400,000 $436,741.42 $36,741.42 $257,893.62
1/2/2017 $400,000 $438,394.79 $38,394.79 $219,498.84
7/2/2017 $400,000 $440,122.55 $40,122.55 $179,376.28
1/2/2018 $400,000 $441,928.07 $41,928.07 $137,448.22
7/2/2018 $400,000 $443,814.83 $43,814.83 $93,633.39
1/2/2019 $400,000 $445,786.50 $45,786.50 $47,846.89
7/2/2019 $400,000 $447,846.89 $47,846.89 $0.00
 Lyons Document Storage’s controller, Eric Petro, told Rene that the bonds
were issued in 1999 at a discount and that only approximately $9.1
million was received in cash. Explain what is meant by the terms
“premium” or “discount” as they relate to bonds. Compute exactly how
much the company received from its 8% bonds if the rate prevailing at the
time of the original issue was 9% as indicated in Exhibit 2. Also, re-
compute the amounts shown in the balance sheet at December 31, 2006,
and December 31, 2007, for Long-Term Debt. What is the current market
value of the bonds outstanding at the current effective interest rate of
6%?

hat it is a premium bond.

e market rate. In simple
d is higher.
at it is a discount bond. This
ket rate. In simple terms,
ower.

Balance from the

Bond Value
$9,079,921
$9,088,517.21
$9,097,500.49
$9,106,888.01
$9,116,697.97
$9,126,949.38
$9,137,662.10
$9,148,856.90
$9,160,555.46
$9,172,780.45
$9,185,555.57
$9,198,905.57
$9,212,856.32
$9,227,434.86
$9,242,669.43
$9,258,589.55
$9,275,226.08
$9,292,611.26
$9,310,778.76
$9,329,763.81
$9,349,603.18
$9,370,335.32
 $9,392,000.41
$9,414,640.43
$9,438,299.25
$9,463,022.71
$9,488,858.74
$9,515,857.38
$9,544,070.96
$9,573,554.15
$9,604,364.09
$9,636,560.48
$9,670,205.70
$9,705,364.95
$9,742,106.38
$9,780,501.16
$9,820,623.72
$9,862,551.78
$9,906,366.61
$9,952,153.11
$10,000,000.00
If you were Rene Cook, would you recommend issuing $10 million, 6%
bonds on January 2, 2009 and using the proceeds and other cash to
refund the existing $10 million, 8% bonds? Will it cost more, in terms
of principal and interest payments, to keep the existing bonds or to
issue new ones at a lower rate? Be prepared to discuss the impact of a
bond refunding on the following areas:
-->cash flows
-->current year’s earnings
-->future years’ earnings
Note: For purposes of your computations, assume that refunding, if
selected, occurs effective January 2, 2009, at a price of $1,154.15 per
bond. Ignore the effects of income taxes. How many new $1,000
bonds will Lyons have to issue to refund the old 9% bonds?
Assume 6% bonds could be issued and the proceeds used to refund
the existing bonds. Compare the effects of these transactions with
those calculated in Question 2. If you were Rene Cook, what amount
of new bonds would you recommend and why?