n = 20 years * 2 times per year = 40
coupon: 800,000 * (0.11 / 2) = 44,000
Present value of principal repayment =
PV = FV / (1 + i)^n
= 800,000 / 1.06^40
= 77,777.75
Present value of interest payments =
use Present Value ordinary annuity "PVoa"...
PVoa = PMT [(1 - (1 / (1 + i)^n)) / i]
= 44,000[(1 - (1 / 1.06^40)) / 0.06]
= 44k[(1 - 0.09722) / 0.06]
= 44k[15.0463]
= 662,037.06
Price is the sum of the discounted cash flows: (add the two together) = $739,814.81
(Note that they give you this answer in the question. My answer is most likely off slightly due to rounding - they may have rounded at some point b/4 the very end, whereas I did not round until the very end.)
Obviously, I don't have the "template" but if you are being asked to use the effective interest rate method....
Accrue interest on the price at the periodic discount rate:
739,814.81 * 0.06 = $44,388.89
44,000
44,388.89 - 44,000 = 388.89
For the effective interest rate method, this amortization is "added" to the balance / reducing the total discount, such that for the next six month period you would accrue interest on...
739,814.81 + 388.89 = 740,203.70...* 0.06 = $44,412.22
subtract $44k coupon = 412.22
new "balance" 740,203.70 + 412.22 =740,615.92
As time passes, this "balance" will equal par ($800k) at maturity, and the bond discount will equal 0. Essentially, the effective interest rate method expenses the bond discount over time.
On January 1, 2012, Truman Corporation issued $800,000 of 20-year, 11% bonds for $739,813, yielding a market (yield) rate of 12%. Interest is payable semiannually on June 30 and December 31
Confirm Bond Issue Price
Present value of principal repayment =
Present value of interest payments =
Selling price of bonds =
Indicate the financial statement effects using the template for (1) bond issuance, (2) semiannual interest payment and discount amortization on June 30, 2012, and (3) semiannual interest payment and discount amortization on December 31, 2012.
