On January 1, assume that Comcast issues $300,000 of 15-year, 10% bonds payable for $351,876, yielding an effective semiannual interest rate of 4%. Interest is payable semiannually on June 30 and December 31.

Scenario 1: Firm issues a bond for $100 and has to pay 8% interest. The firm issues the bond for one year. Present Value Principal 100 92.5925926 Annuity (8% of $100) 8 7.40740741 Amount reported on Balance Sheet 100 Market rate = Coupon 8.00% Periods 1 Scenario 2: Firm issues a bond for $100 and has to pay 8% interest. The market rate at the time of issue is 9%. The firm issues the bond for one year. Present Value Principal 100 91.7431193 Annuity (8% of $100) 8 7.33944954 Amount reported on Balance Sheet 99.0825688 Market rate > Coupon (DISCOUNT) 9.00% Periods 1 QUESTION: If firm still pays 8%, how does investor earn 9%? Investor pays 99.0825688 Investor receives back 108 Return 9.00% Information on Slide for Union Pacific Corporation Present Value Principal 500 333.857399 Annuity (2% of $500 2x a yr) 10 162.884903 Amount reported on Balance Sheet 496.742302 Market rate = Coupon 2.04% Periods 20 Scenario 3: Right after issuance interest rates drop to 6%. The company decides to buy the bond back and issues new bonds at 6% OLD BOND Present Value NEW BOND Present Value Interest savings PV of interest savings Principal 100 94.3396226 Principal 100 94.3396226 2 1.886792453 Annuity (8% of $100) 8 7.54716981 Annuity (8% of $100) 6 5.66037736 (the PV of interst savings is equal to the higher Amount bond is traded in the market 101.886792 Amount bond is traded in the market 100 amount we have to pay back 101.886 - 100 = 1.886) Market rate > Coupon (DISCOUNT) 6.00% Market rate = Coupon 6.00% Periods 1 Periods 1